APRIL 2018 | ISSUE 205 MIDDLE EAST
APRIL 2018 | ISSUE 205
THE KINGDOM’S FIRST SOREN KRING NIKOLAJSEN, Managing Director, Alawwal Bank
DARKEST BEFORE DAWN?
For many years, Iraqi citizens have felt that the only way is up—and analysts are finally starting to agree
Where can asset allocators find ballast when both volatility and correlations are rising?
AI is the key to the future of banks and to banks of the future
A CPI Financial Publication
THE KINGDOM’S FIRST SOREN KRING NIKOLAJSEN, Managing Director, Alawwal Bank
Dubai Technology and Media Free Zone Authority
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pril was graced with positive news when Bahrain revealed that it struck oil offshore, west of the Kingdom. This renewed hopeful sentiments across GCC markets and the wider Middle East as markets begin to pick up across the region. With governments such as Kuwait and Saudi Arabia rolling out various initiatives to continue its diversification agendas and drive foreign investment into their respective economies, worldwide attention is at an all time high for the Middle East. Geopolitical issues remain a prime concern for investors at all levels. However, with such risks taken into consideration, credit and investment although at a higher cost, still seem to be coming in quite steadily. Saudi Arabia witnessed several strategic agreements signed across the board with partners from China and the UK; the UAE, similarly with China, Italy, Bahrain and India. As business activity begin to accelerate across the region gearing up to large infrastructure and tourism projects, industry constituents must also consider economic sustainability after these large projects are completed. Financial institutions are now more than ever, carefully evaluating and selecting best-in-class financial technology providers to partner with as they embark on their digital transformation programmes. It is now a well-acknowledged fact across the region’s industry that financial institutions need to be default digital to meet customer expectations and, in the future, the changing demographics which will mostly comprise of millennials who have high-standards of digital products.
In this issue of the magazine, as usual we take you through the motions providing you with an overview of the most important developments across the region over the past few weeks; thereafter giving you an exclusive interview and an unprecedented insight into Alawwal Bank’s journey in shaping its future. Our Country Focus this month is on Iraq— we take a look at the positive initiatives both from Government and international entities that have encouraged fairly substantial developments in the economy. Providing you an insight into the trends shaping the banking and financial landscape in the Middle East, we also bring you excusive commentaries on green Sukuk, efficient retail banking strategies, going digital in insurance management, investment in solar and sustainable projects, and many more. With a jam-packed issue, as usual I wish you a productive and enjoyable read.
Nabilah Annuar EDITOR, BANKER MIDDLE EAST
APRIL 2018 | ISSUE 205
54 Digital transformation in a high-tech economy
58 It’s time to take the future seriously ASSET MANAGEMENT
44 Green Sukuk: driving issuance in the GCC RETAIL BANKING
46 Virtual account management: a major opportunity to streamline your accounts receivable and improve operational efficiency 48 Unlocking cardless ATMs
10 Black gold: a blessing and a curse 14 News Highlights THE MARKETS
20 Tapping into Saudi’s debt 22 Uptick in M&As continue into 2018 COVER INTERVIEW
26 The Kingdom’s first
36 Darkest before dawn?
62 Maintaining balance
66 Offshore incorporation: pros and cons TECHNOLOGY
72 Limitless potential 74 When cybercriminals take on financial institutions
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78 The future of Bahraini banking 80 Towards a sustainable future EVENTS
THE KINGDOM’S FIRST SOREN KRING NIKOLAJSEN, Managing Director, Alawwal Bank
90 2018: A banking odyssey
APRIL 2018 | ISSUE 205
APRIL 2018 | ISSUE 205
THE LONG VIEW
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DARKEST BEFORE DAWN?
For many years, Iraqi citizens have felt that the only way is up—and analysts are finally starting to agree
Where can asset allocators find ballast when both volatility and correlations are rising?
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AI is the key to the future of banks and to banks of the future
A CPI Financial Publication
THE KINGDOM’S FIRST SOREN KRING NIKOLAJSEN, Managing Director, Alawwal Bank
Dubai Technology and Media Free Zone Authority
MARCH 2018 | ISSUE 204
MARCH 2018 | ISSUE 204
TOKENOMICS: MEET THE NEW FACE OF VALUE INNOVATION REZA DARI, CEO, Global Investment Bank
OMAN: NEW BEGINNINGS
The world’s oldest independent Arab state must adapt to a new world
RIDING THE WAVE
The private equity and venture capital landscape is largely dependent on diversification agendas and international events across the region
GREEN DEVELOPMENTS IN ISLAMIC FINANCE
The global increase in environmental awareness has led to a rise in appetite for green bonds and Sukuk
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FEBRUARY 2018 | ISSUE 203
email@example.com THE RISE OF GCC BONDS A healthy pipeline for 2018 despite precarious oil prices and geopolitical instability
BALANCE OF POWER The hard work begins in Saudi Arabia
THE MENA POTENTIAL
Venture capital activity rising to the eyes of the west
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BLACK GOLD: A BLESSING AND A CURSE Making the largest oil discovery since 1932 may not impact Bahrain’s economic and fiscal metrics for at least another five years
he government of Bahrain on 1 April 2018 announced the discovery of a new tight oil— the Kingdom’s largest discovery since 1932—and this was no Aprilfool’s joke. Breathing a new lease of life into the Kingdom’s concerning fiscal and economic conundrum, the oil was found in a deep gas resource in the Khaleej Al Bahrain Basin, located off the west coast of the Kingdom.
DISCOVERY Bahrain’s National Oil and Gas Authority (NOGA), alongside international consultants DeGolyer and MacNaughton, Halliburton, and Schlumberger, in a press conference, revealed that the tight oil discovered amounts to at least 80 billion barrels. The new resource is forecast to contain highly significant quantities of tight oil and deep gas, understood to dwarf Bahrain’s current reserves.
Tight oil is a form of light crude oil held in shale deep below the earth’s surface that is extracted with hydraulic fracturing, or fracking, using deep horizontal wells. “Today we announce that initial analysis demonstrates the find is at substantial levels, capable of supporting the long-term extraction of tight oil and deep gas,” said Shaikh Mohamed bin Khalifa Al Khalifa, Bahrain’s Minister of Oil.
IF VERIFIED BY AN INTERNATIONAL OIL CONSORTIUM AS BEING TECHNICALLY AND ECONOMICALLY RECOVERABLE—COULD STIMULATE PRIVATE INVESTMENT IN THE COUNTRY’S ENERGY SECTOR IN THE NEAR TERM. Moody’s “DeGolyer and MacNaughton’s and Haliburton’s independent appraisals have confirmed NOGA’s find of highly significant quantities of oil in-place for the Khalij Al Bahrain, with tight oil amounting to at least 80 billion barrels, and deep gas reserves in the region of 10-20 trillion cubic feet.” The discovery, made within the 2,000 km2 Khalij Al-Bahrain Basin, is located in shallow waters off the Kingdom’s west coast, close to a fully-operational oil field with ready-to-connect-to facilities, according to Halliburton, who added that this unique factor provides potential for significant cost optimisation. It was discovered during the last three months of 2017 following Bahrain’s search for new fossil fuel deposits, with details of their viability to be released in due course. Additionally, a separate discovery of significant gas reserves in two accumulations below Bahrain’s main gas reservoir were also confirmed. Extensive work has already been carried out to evaluate in-place volumes. The first well in the drilling programme is planned to produce in August, and over the next two years focus will be given to maximising production and commercial efficiency. “Agreement has been reached with Halliburton to commence drilling on two further appraisal wells in 2018, to further evaluate reservoir potential, optimise completions, and initiate long-term production,” the Minister added. THE DREAM In a commentary on this development, Moody’s suggests that this supports Bahrain’s sovereign credit over longer term. It could stimulate private investment in the country’s energy sector over the near term, and in the medium term could
increase government oil and gas-related revenue and reduce the country’s fiscal and current account deficit. Bahrain is the GCC’s oldest oil producer, having started oil production in the early 1930s. However, its hydrocarbon endowment is relatively small, with an output of less than 200 thousand barrels per day (bpd), of which around 150,000 bpd comes from an offshore field that it shares with Saudi Arabia (A1 stable). Bahrain’s onshore oil reserves, which the US Energy Information Administration (EIA) estimates at 125 million barrels, are all located in the Awali oil field and at the current rate of production, they will last less than seven years. As such, a significant oil and gas discovery could improve Bahrain’s economic and fiscal strength by allowing the kingdom to boost its rate of hydrocarbon production (and hence gross domestic product) and/or to
extend its current rate of production for a number of additional years, explained the ratings agency. “Oil in place of 80 billion barrels is based on a P50 resource estimate,” said DeGolyer and MacNaughton Senior Vice president, Dr John Hornbrook. “The discovery breaks new ground for the Bahrain oil and gas industry using established technologies.” It was also noted that, typically, only a small fraction of any reservoir’s ‘oil in place’—which is what the 80 billion barrels in the official announcement refers to—can be recovered using available technologies and at a cost that would be economical given the prevailing market conditions and prices. And only resources that are technically and economically recoverable with a high degree of certainty can be considered proved reserves, which is the measure of oil reserves that we use when assessing the underlying economic strength of an oil exporter. The newly-discovered resource, which officials expect to be ‘on production’ within five years, is expected to provide significant and long-term positive benefits to the Kingdom’s economy—both directly and indirectly through downstream
The Bahraini government reportedly earned
$4.3 billion $2.7 billion
in oil and gas revenue last year and ran a budget deficit of
PHOTO CREDIT: Shutterstock/Kanok Sulaiman
SOVEREIGN AND SUPRANATIONAL
MOODY'S INVESTORS SERVICE
gross domestic product) and/or to extend its current rate of production of r a nu mber of additional years. Despite Bahrain's ol w oil and gas endo wment relative to its GCC peers, hydrocarbon-related revenue still accounted of r 75% of government revenue in 017, 2 down from a recenthigh of 87% in 013 2 s( ee Exhibit 2). A arge l increase in ahrain's B oil production, and associated fiscal revenue, could therefore materially reduce Bahrain's budget deficit, which was as igh h as 17 .8% of GDP in 016. 2
AMONG GCC PEERS, BAHRAIN'S GOVERNMENT REVENUE STREAM IS ONE OF THE Exhibit 2 MOST DEPENDENT ON OILrevenue (Hydrocarbon revenue, % ofon total government revenue) Among GCC peers, Bahrain's government stream is one of the most dependent oil (Hydrocarbon revenue, % of total government revenue) 100
20 10 0 UAE
Sources: Moody's Investors Service, International Monetary Fund
Source: Moody's Investors Service, International Monetary Fund
Bahrain's current account would also benefit. Oil exports accounted of r 55% of total goods exports in 017. 2 When oil prices decl ined after mid-2014, the dollar value of Bahrain's oil exports dropped significantly and he t country's current account swung from surpluses averaging 8% of GDP in 012-13 2 to deficits averaging .7% 3 of GDP in 015-17. 2
activities in related industries. The next Bahrain's current account deterioration has driven he t al rge erosion of of reign exchange reserves om fr a peakof $5.8 billion at the end stage of development will focus on of 2014 to a ow l of $1.3 billion in uly J 2017 s( ee Exhibit 3). Th e reserves ave h since reco vered somewhat on the back of al rge sovereign external bond robust issuances, incl uding $3 billion in int ernationaland bonds in eptember S 2017 and 1$ billion in int ernational sukuk in April ensuring frameworks, data 2018. But with of reign reserves fo $2.8 billion at the end fo November covering only 1.4 months of imports of goods and services and terms are in place to facilitate further less than 10% of Bahrain's short-term external debt, pressure on Bahrain's pegged ex change rate regime is no w at its highest since he t formal peg foand the rial tcommercial o the dollar was introduced in 001. 2 activities opportunities with international partners. Exhibit 3 Bahrain's foreign exchange reserves have fallen since the country started posted current account deficits (US$ billion)
Under the assumption of a
REALITY 7 Based on EIA research, the average 6 recovery factor for tight oil deposits 5 recovery factor ranges between three per cent and six 4 cent of the initial oil in place. For per 3 Bahrain, the technical recoverability of its oil find may yield up to 2 Bahrain’s new new found oil reservoir could be closer 1 to0the lower end of the range because 2010 2011 2012 2013 2014 2015 2016 2017 itSource: is located offshore, below the seabed, International Monetary Fund barrels of recoverable oil reserves and hence its recoverability is likely to be This publication does not announce a redit c ar ting action. For any credit ar tings er ferenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.commore of r the most challenging updated credit ar ting action ni formation and ar ting history. technically and costly. As the reservoir is tight, what can be recovered may well be within the one 2018 Government of Bahrain: New oil discovery, if recoverable, could support sovereign credit quality over the longer term to16 April seven billion barrel range. Under the assumption of a three per cent recovery factor, Bahrain’s new oil find may yield up to 2.4 billion barrels of recoverable oil reserves—a little less than half of Oman’s proved reserves. Despite Bahrain’s low oil and gas Bahrain is currently ranked 57 on the list of biggest producers by the US endowment relative to its GCC peers, Energy Information Administration, pumping an estimated 45,000 barrels of hydrocarbon-related revenue still oil a day, according to Bloomberg data. Bahrain has approximately 124.6 million barrels of proven reserves, accounted for 75 per cent of government and currently gets it oil revenues from two fields: the onshore Bahrain revenue in 2017, down from a recent high field, and the offshore Abu Safah field, which is shared jointly with Saudi of 87 per cent in 2013. A large increase in Arabia. The Bahrain field, produced around 50,000 barrels per day (bpd) in Bahrain’s oil production, and associated 2015, according to the US Energy Information Administration, and Bahrain fiscal revenue, could therefore materially and Saudi Arabia split annual revenues from the 300,000 bpd Abu Safah offshore field where production is overseen by Saudi Aramco. reduce Bahrain’s budget deficit, which was as high as 17.8 per cent of GDP in 2016.
Bahrain’s current account would also benefit. When oil prices declined after mid-2014, the dollar value of Bahrain’s oil exports dropped significantly and the country’s current account swung from surpluses averaging 8 per cent of GDP in 2012-13 to deficits averaging 3.7 per cent of GDP in 2015-17. Bahrain’s current account deterioration has driven the large erosion of foreign exchange reserves from a peak of $5.8 billion at the end of 2014 to a low of $1.3 billion in July 2017. The reserves have since recovered somewhat on the back of large sovereign external bond issuances, including $3 billion in international bonds in September 2017 and $1 billion in international Sukuk in April 2018. But with foreign reserves of $2.8 billion at the end of November covering only 1.4 months of imports of goods and services and less than 10 per cent of Bahrain’s shortterm external debt, pressure on Bahrain’s pegged exchange rate regime is now at its highest since the formal peg of the rial to the dollar was introduced in 2001. Therefore, Moody’s does not expect new oil production to impact Bahrain’s economic and fiscal metrics for at least another five years. In the meantime, the kingdom’s credit profile could still remain the weakest among GCC peers and the most vulnerable, fiscally and externally, to potential declines in oil prices, its vulnerability of which is captured by the highest combination of fiscal and external breakeven oil prices in the region.
ADS Guide.indd 42
Lebanese public investments receives EUR 800 million boost The President of the European Investment Bank (EIB), Werner Hoyer announced that Lebanon would receive up to EUR 800 million of support to public investments by 2020 at the CEDRE conference in Paris. Hoyer commended the Lebanese authorities for the reforms implemented so far. He highlighted that the pursuit of such reforms and the new measures presented during the conference would enable the EIB to deploy investments of up to EUR 800 million. Lebanon would be supported via the EIB’s Economic Resilience Initiative for the Western Balkans and Southern Neighbourhood (ERI) which is intended to encourage investment in the EU Neighbourhood Countries. Through investment in key infrastructure and the private sector, it will create opportunities for employment and conditions for growth. This will include increasing the provision of services like energy, transport, water, sanitation and education. The EIB is a longstanding partner to Lebanon. It recently signed a financing agreement of EUR 68 million for the expansion of Al Ghadir water and wastewater plant. Over the years, EIB provided financing across many sectors; energy (EUR 112 million), transport (EUR 335 million), equity (EUR 26.5 million), water and wastewater (EUR 401 million) as well as private sector development (EUR 705 million). The Bank is working closely with the government of Lebanon to provide necessary finance for needed projects.
Saudi Arabia to list 45 bonds and Sukuk on Tadawul, totalling SAR 204 billion Saudi Arabia’s Ministry of Finance, represented by its Debt Management Office, announced the approval from the Capital Market Authority to list and trade Saudi Riyal-denominated government debt instruments on the Saudi Stock Exchange Tadawul. This will include both bonds and Sukuk, according to a statement from the Ministry. The Debt Management Office commenced registering government debt instruments at the Securities Depository centre via the Tadawul platform in April 2017. The new listing will come into effect on 8 April 2018 through a joint press conference to be held by the Ministry of Finance/Debt Management Office, the Capital Market Authority and Tadawul. In total, 45 bonds and Sukuk will be issued, totalling over SAR 204 billion. From this, SAR 58 billion will be Government Sukuk. The period of issuance varies for each of the government debt instruments. Maturities of the instruments to be listed vary between five, seven and 10 years.
Oman oil price hits three-year high in April The price of oil for Oman’s June 2018 delivery rose to $69.08 per barrel compared to $68.66 the day before, recording a rise was 46 cents in a single day—the largest price per barrel since the recent oil glut began in 2015, according to the Dubai Mercantile Exchange (DME). Analysts believe this to be positive for Oman as the revenue from the government will certainly get a boost which will in turn lead to better management of the country’s fiscal deficit. The recent estimates by the International Monetary Fund (IMF) that the deficit to gross domestic product ratio is at 11 per cent for 2018, though with oil at $69.08 per barrel level, this ratio will be reduced. According to local reports, the predicted increase in oil prices and the expansion of the non-oil economy will improve the macroeconomic outlook. The fundamentals are strong, and as global supply dips and demand increases, there is a synchronised rebound in the oil market. This will result in the private sector once again investing in oil and gas projects, and liquidity will slowly creep back in to the market. The prices of oil show that we should be geared up and ready for an upbeat in the economy very shortly.
Kuwait buys stake in refinery to boost oil sales to India In a bid to sell an additional 200,000 barrels per day (bpd) of crude oil to India, Kuwait has purchased a stake in an oil refinery in the country. According to a report by Reuters, this venture was confirmed Kuwait Petroleum International (KPI) Chief Executive Officer, Nabil Bourisli. Kuwait’s oil production is currently at 2.7 million, in compliance with OPEC cuts, though their capacity is an estimated 3.3 million bpd. The country operates two refineries with a total capacity of about 780,000 bpd, with a clean fuels project to upgrade a refinery which is expected to be completed by October. Its Al-Zour refinery, with a capacity of 615,000 bpd, is on track for start-up in the second half of 2019, said Bourisli.
Bahrain issues $1 billion seven-year Sukuk
Survey reveals 98 per cent of UAE consumers prefer biometrics for payments According to the survey commissioned by Visa and conducted by AYTM Market Research, 98 per cent of consumers would like to use at least one method of biometrics to make future payments, with 69 per cent interested in paying using fingerprint recognition and 56 per cent keen to pay using eye scanning technology. More than three quarters (77 per cent) of consumers perceive biometrics to be faster than passwords and 79 per cent perceive them as easier. There is also a high awareness of biometric technology among consumers with over half (51 per cent) being “very familiar” and 38 per cent being “somewhat familiar”. Additionally, 82 per cent of consumers would likely switch away from a credit or debit card provider that does not offer biometric authentication in the future, whilst 79 per cent would switch banks and 77 per cent would change mobile phone provider. The top benefit of using biometric authentication cited by respondents is stronger security compared to passwords and PINs (45 per cent). Conversely, one of the top concerns of using biometric authentication for payments is also security and the loss of sensitive information (e.g. fingerprint) that cannot be changed (48 per cent).
The Kingdom of Bahrain has successfully priced a Rule 144A/RegS international $1 billion 6.875 per cent October 2025 Sukuk offering. The transaction received strong global investor interest, with the orderbook peaking at around $2.1 billion (2.1x of the total amount raised) from more than 100 investors. The financing exercise forms part of the Kingdom’s prudent approach in managing its funding requirements. The offering attracted a globally diversified orderbook from both Islamic and conventional investors, with 59 per cent of the notes distributed in MENA, 16 per cent in Europe, 14 per cent in UK, nine per cent in the US and two per cent into Asia. Distribution by investor type comprised 63 per cent of Banks/Private Banks, 33 per cent of Fund Managers, three per cent of Pensions and Insurance, and one per cent others. The Kingdom is expected to raise financings through other sources of funding, including local debt capital markets and potentially could seek to come back to the international debt capital markets at a later stage in 2018.
Noor Bank auctions $500 million Sukuk Noor Bank has priced a benchmark-sized Sukuk issuance at a profit rate of 4.471 per cent, equivalent to five-year mid-swaps plus 165 bps. The $500 million debenture carries a five-year tenor and is structured under the Wakalah structure, according to local industry reports. The issuance, which matures in April 2023, was oversubscribed 2.1 times, receiving orders worth $1.07 billion from a diverse group of investors, with a third of which originating from outside the Middle East.
IMF calls central banks to monitor monetary tightening and regulate cryptocurrencies The International Monetary Fund (IMF) has urged central banks yesterday to take a gradual and transparent approach to tightening monetary policy, warning that unexpected moves could shock the global economy. The fund cautioned that investors and financial markets expect a steady approach to monetary tightening based on the belief inflation will remain relatively tame, reported AFP. The IMF also pointed to some fragilities in global finance after a lengthy period of easy money policies and low interest rates. If conditions change abruptly that could even derail the economic recovery, the fund warned. As the US Federal Reserve undertook a series of interest rate hikes over the last two and a half years, and with the European Central Bank signalling plans to end its stimulus programme soon, central banks should maintain accommodation as needed and raise rates in a gradual and well-communicated manner. Additionally, the IMF highlighted the increasing concern among regulators about cryptocurrencies and called for more international attention on the issue. While the fund saw potential for digital money to make the financial system more efficient, it warned that they have been afflicted by notorious cases of fraud, security breaches, and operational failures and have been associated with illicit activities.
Higher oil prices to have no impact in GCC credit profiles Creditworthiness for GCC countries will remain driven by government responses to economic, fiscal and external challenges rather than the recent rise in oil prices, said Moody’s Investors Service in a recent report published. The ratings agency expects oil prices to remain volatile, ranging between $45-65 per barrel, and forecasts average prices of $60 per barrel in 2018 and 2019 before softening to $55 per barrel beyond that. The recent rise in oil prices will lead to a short-term reduction of pressures on GCC governments’ balances sheets by reducing fiscal deficits and slowing the build-up of government debt. Lower current account deficits (or larger surpluses) due to higher hydrocarbon exports will improve external liquidity and slow the drawdown of foreign-exchange reserves and sovereign wealth fund assets. However, the changes in fiscal and external balances, are not significant enough to support fiscal strength or external vulnerability. There is a risk that higher oil prices could slow the reform momentum in the GCC. Such slowdown would be most credit negative in Bahrain and Oman, where the fiscal challenges are most acute. Oil at $60 per barrel will reduce gross borrowing requirements across the GCC. However, sovereign external issuances will remain high in Oman, Bahrain and Saudi Arabia reflecting a limited scope of funding budget deficits domestically.
DIFC rolls out initiatives to boost Dubai’s global status Dubai International Financial Centre (DIFC) has announced three new strategic initiatives as part of the economyboosting initiatives aimed at catalysing economic growth in Dubai and cementing its global status as a competitive business destination. DIFC’s three initiatives focus on: 1) attracting foreign direct investment (FDI), particularly from south-east Asia; 2) enabling Dubai Government entities to complete financial services within DIFC; and 3) facilitating the provision of financial products through Dubai. This DIFC-led new initiative aims at attracting FDI, particularly from south-east Asia, through Dubai. This initiative also aims at cementing Dubai’s role as a strategic centre for China’s Belt and Road initiative. DIFC remains focused on enhancing the integrated platform it offers to Chinese financial institutions and providing them with greater access to the South to South economic corridor. The second initiative aims at offering the necessary regulatory and legal framework to enable government and semi-government entities to complete all activities relating to financial services, including deposits, IPOs, and mergers and acquisitions, from within DIFC. This will in turn contribute to boosting the size of financial operations in Dubai and re-directing a large portion of these entities’ deposits. DIFC’s third initiative aims at facilitating the provision of financial products from Dubai to local and regional markets, by coordinating with local and federal regulatory bodies and deploying capabilities to avoid any obstacles facing the provision of these products. This is expected to increase financial investments in Dubai and boost Dubai’s wealth management capabilities.
ADS Guide.indd 63
Middle East merger transactions reach $13.9 billion in Q1
MENA requires $260 billion in investments to meet electricity demand in five years
The value of announced merger and acquisition (M&A) transactions with MENA involvement reached $13.9 billion in the first quarter of 2018, seven per cent more than the value recorded during the first quarter of 2017 and a three-year high. Thompson Reuters revealed that deals with a MENA target reached an eight-year high, rising to $11.2 billion, up 50 per cent from the same period in 2017, while inter-MENA or domestic deals reached a five-year high, also up 42 per cent year-on-year, Nadim Najjar, Managing Director, Middle East and North Africa said in a statement. MENA’s inbound M&A currently stands at an all-time high, driven by Total SA’s acquisition of 20 per cent of Umm Shaif and Nasr concession of Emirati state-owned Abu Dhabi National Oil Co for $1.1 billion, while outbound M&A decreased from $3.3 billion in the first quarter of 2017 to $779 million so far for 2018. Thomson Reuters added that energy and power deals accounted for 54 per cent of MENA involvement M&A by value, and despite having the same number of transactions as the financial sector, the latter only accounts for 10.7 per cent of the region’s M&A activity. MENA equity and equity-related issuance totalled $1.4 billion during the first quarter of 2018, a 158 per cent increase year-on-year. Out of the six transactions announced so far this year, five have been follow-on offerings, raising a total of $1.3 billion and accounting for 92 per cent of the quarter’s equity capital market (ECM) activity in the region. The biggest deal for Q1 2018 was Orange Egypt’s follow-on which raised $866 million, and EFG Hermes leads the MENA ECM ranking with a 63.4 per cent market share.
In its latest research report, the Arab Petroleum Investments Corporation (APICORP), found that electricity demand and consumption have been growing rapidly in the MENA region, driven by population growth and urbanisation, rising income levels, industrialisation, and low electricity prices. While economic growth has slowed compared with historical highs, the International Monetary Fund (IMF) still expects an increase of 3.2 per cent in 2018 and 2019, rising to 3.5 per cent in 2022. The region’s population is also expected to grow at an average rate of 1.5 per cent per year in that same period. To meet this rising demand, APICORP estimates that MENA power capacity will need to expand by an average of 6.4 per cent each year between 2018 and 2022, which corresponds to additional capacity of 117GW. APICORP forecasts that $152 billion will be needed to deliver this additional capacity, with a further $108 billion needed for transmission and distribution. Ghassan Al-Akwaa, Energy Sector Specialist at APICORP, said that fiscal challenges have meant that governments are no longer able to support the provision of cheap power, and many countries are accelerating their price reform plans with the aim of liberalising prices in the short term. While these programmes will aim to reduce the fiscal burden on governments, they will also put downward pressure on power demand. Whilst it currently represents 47 per cent, or 151GW, of current MENA power generating capacity, APICORP forecasts that the GCC will need to invest $55 billion to create 43GW of additional generating capacity and another $34 billion in transmission and distribution over the next five years.
RATINGS REVIEW Entity
Bahrain Egypt Iraq
ST IDR/ST Rtg (FC)
Ras Al Khaimah
LT IDR/LT Rtg (FC)
B B B
LT IDR/LT Rtg (LC)
ST IDR/ST Rtg (LC)
KEY Positive Negative Evolving Stable
Saudi Arabia Qatar
TAPPING INTO SAUDI’S DEBT What should emerging market investors know when they unlock Saudi Arabia’s $54.5 billion government debt? Mohammed Khnifer, Debt Capital Markets Senior Associate at the Islamic Corporation for the Development of the Private Sector (ICD), explains
arly April 2018, Saudi Arabia’s securities regulator announced that it had approved the listing of local currency government Sukuk and bonds on the Saudi Stock Exchange. The week after saw over SAR 204.4 billion ($54.5 billion) worth of government debt being traded on the local exchange. This is a landmark move because we’re talking about $54.5 billion coming to the market in one go. It will enable, for the first time, qualified and approved foreign investors to purchase that debt at floating, fixed, as bond and Sukuk, as well as with different tenors. This will give emerging market debt investors access to this untapped local debt which has been closed off for several years. Local debt is becoming a trend in emerging markets and many investors plan to increase their exposure to local currency debt. This especially due to the fact that the SAR is pegged to the USD, therefore it is stabilised. While listing will help develop an active yield curve, I caution that it will take time. The initial assumption that there will be active trading is something
I doubt because no market makers and primary dealers have been assigned yet. Once these steps are taken, we should then see an active tradability, which will be positive as it will enable corporates to have a local and active reference benchmark.
THE LISTING AND TRADABILITY OF LOCAL CURRENCY BONDS AND SUKUK WITH A FIXED RATE COULD CREATE THE CULTURE OF PRICING CORPORATE BONDS THROUGH A FIXED RATE INSTEAD OF A FLOATING RATE.
On the local level there is huge publicity and retail investors are excited and wondering if they could purchase the debt. Unfortunately, they will not be able to do so because the bonds are expensive. Each Sukuk unit will cost approximately SAR 1 million. The listing and tradability of local currency bonds and Sukuk with a fixed rate could create the culture of pricing corporate bonds through a fixed rate instead of a floating rate. Most DCM deals are priced at floating rate—this is probably because the investor base are banks and they dictate the nature of the rate they are looking for and it will usually be in their favour when the local reference rate (SAIBOR) moves up—this is in turn a negative for corporates as it will affect their profits. The listing will create awareness of fixed rates as well as the pricing of bonds and Sukuk. Potential issuers will also have a local and active benchmark when it comes to fair price and this will raise awareness of credit ratings. Overall, this will have positive impact on the local debt market in Saudi Arabia and the wider emerging market space.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of the Islamic Corporation for the Development of the Private Sector (ICD).
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UPTICK IN M&As CONTINUE INTO 2018
Marco De Leo and Roberto Flammia, both local Partners at BonelliErede Dubai, provide a comprehensive projection of potential deal flows across the M&A, project finance and PPP in the Middle East pipeline this year
M&As in the Middle East increased to a total of
$18.7 billion Source: BonelliErede Dubai
ollowing positive developments in 2017 and the increase of the mergers and acquisitions (M&A) in the Middle East to a total of $18.7 billion, we are cautiously optimistic to see this trend continue in 2018. While we anticipate increased M&A activity across industries, it will be interesting to closely follow the IT and logistics sectors, where we expect to see the volume of transactions surge the most. Artificial intelligence (AI) will also play a critical role within the Middle Eastâ€™s economy, and both the UAE and Saudi Arabia have demonstrated their commitment towards implementing AI and have developed dedicated strategies. Significant investments are expected, with a strong focus on the financial sector, especially in light of the support of local governments seeking alternative revenue and growth sources considering the volatility in oil prices. While global uncertainties, such us Brexit, the US presidential election and the US tax reform affected the volume of healthcare transactions in 2017, in 2018 we expect healthcare M&A deals in the Middle East to rise significantly, due to an increasing consumer demand as well as a clear acquisition and diversification strategy of the main healthcare providers.
PHOTO CREDIT: Shutterstock/Boy_Phawat
M&A activity will also be boosted by busy debt capital markets where refinancing and restructuring at both corporate and bank level is expected. With regards to project finance, the renewable energy sector has seen the most interesting developments in the Middle East in 2017, and we expect this development to continue in 2018 with a constant flow of important deals. The renewable energy sector is particularly interesting, considering the cooperation between Jordan, UAE, Saudi Arabia and Egypt as well as the announcement of the Saudi Vision 2030, which was initiated by the Crown Prince of Saudi Arabia, Prince Mohammed Bin Salman Al Saud, which includes ambitious plans to build an innovative industrial centre at the Red Sea to boost economic diversification and help reduce the countryâ€™s dependency on oil. While project finance is less widely used for oil and gas projects in the Middle East where the preference for equity investments prevails, the sectors that have the most potential to see strong margins in project finance and Public Private Partnerships (PPP) in 2018 are healthcare, education and transport infrastructure. In recent years, regional governments have already started to implement private investments in these sectors (formerly exclusively state-funded) using PPP structures to emulate private sector efficiencies. We can see regional governments developing their PPP laws to align to international standards and make foreign investment more attractive, by ensuring the implementation of efficient dispute resolution mechanisms, amongst other things. This will likely fuel an increase in PPP deals in the region structured on project finance sourced from commercial banks and export credit agencies by providing guarantees and/or direct loans.
Marco De Leo, Local Partner, BonelliErede Dubai
Roberto Flammia, Local Partner, BonelliErede Dubai
IT WILL BE INTERESTING TO CLOSELY FOLLOW THE IT AND LOGISTICS SECTORS, WHERE WE EXPECT TO SEE THE VOLUME OF TRANSACTIONS SURGE THE MOST.
THE SECTORS THAT HAVE THE MOST POTENTIAL TO SEE STRONG MARGINS IN PROJECT FINANCE AND PPPS IN 2018 ARE HEALTHCARE, EDUCATION AND TRANSPORT INFRASTRUCTURE.
Marco De Leo
While traditionally not been used in transactions, it would be interesting to observe how Islamic finance can work for the infrastructure sector, as it seems to offer the ideal financing structure here. The most important international M&A, project finance and PPP transactions in 2018 are likely to see deals involving the UAE and Saudi Arabia as the two largest economies in the region, as well as Iraq as an emerging market and Egypt, which traditionally is preferred investment destinations for UAE investors. Additionally, Egypt has ceded two strategic islands in the Red Sea to Saudi Arabia and the two countries have signed important agreements for further developments and investments into Egypt.
This will likely see these two countries tie up more closely over the coming months. Finally, the UAE, Dubai specifically, plays an important role as a hub for directing international investors into Africa. In this regard it will be interesting to observe developments in Sudan, as recently and after two decades of sanctions, the US has decided to revoke the restrictive measures against this country and the local government has announced important financial reforms. In summary we optimistically look ahead towards a dynamic 2018, with increasing deal activity expected in the region and growing appetite from international investors for the Middle East and Africa as emerging economies.
Soren Kring Nikolajsen
THE KINGDOM'S FIRST In a conversation with Banker Middle East, Soren Kring Nikolajsen, Managing Director of Saudi Arabia’s first operating bank, Alawwal Bank, an establishment that was founded in 1926, talks about his vision for the future
he bank rebranded to Alawwal Bank [‘the first bank’] from Saudi Hollandi Bank in November 2016—what have been the benefits of this exercise? We wanted a fresh look and feel that reflected both the modern outlook of the organisation, as well as our proud legacy of being the first bank in the Kingdom. The rebranding has been extremely wellreceived by our customers, with positive feedback from both the younger and the older generations. You’ve been a director of the bank since December 2013 but became Managing Director in January 2017—what do you feel you have achieved over the course of last year and what goals have you set for the bank for this year? Alawwal Bank has a history of leading positive change in the financial services industry, that is a tradition we want to continue.
Over the past year we’ve focused a lot of energy into the continued development of our market leading range of online and mobile services. Digital is fast becoming the channel of choice for our customers, so it’s an area where we can add a lot of value if we keep investing. We’ve tried some things that are new to banking in the Kingdom and I’m pleased to say they’ve proven incredibly popular with our customers. As Saudi Arabia’s oldest bank, one of our goals is to be a good corporate citizen and give back to the communities we serve. We support many charities helping the less privileged in society, we’ve also participated in various initiatives to help young Saudi entrepreneurs. As a major employer in the Kingdom, I’m also very proud of our staff training programmes, some of which are aimed specifically at helping our female colleagues to achieve good careers on equal terms. This is something we will do more off in the future.
Customer receives welcome pack after completing express account opening on the IBDA device.
You’re on record in May last year as saying that Alawwal Bank had roughly doubled its market share within retail banking over the previous three years— can you keep up that pace of growth? We made some smart investments that paid off, but we started from a relatively low base, so that level of growth is kind of a one off. We wanted to expand our retail channel into a more complete proposition, to improve our business mix and reach more customers. To a large extent we have reached our goal. We now have a good quality retail business, offering market-leading products to better support our customers. We have a great platform to build on in 2018 and beyond.
2017 WAS SOMEWHAT OF A TOUGH YEAR AND I THINK MOST BANKS WILL AGREE THE CURRENT LEVEL OF ECONOMIC ACTIVITY IS A LITTLE SLOWER THAN WE WOULD LIKE IT TO BE. I SUSPECT WE WILL SEE THAT CONTINUE THROUGHOUT MOST OF THE YEAR. Soren Kring Nikolajsen, Managing Director at Alawwal Bank
How do you see real estate financing evolving and what are you likely to be doing to assist in raising home ownership in KSA? The mortgage market in Saudi Arabia is relatively young. There is still some work to do from a regulatory and legal infrastructure perspective to bring it in line with more mature markets but it is evolving fast. Promoting home ownership is a key focus for the Government, with ambitious plans outlined in Vision 2030. Relative to our size, Alawwal Bank is amongst the biggest mortgage lenders in the Kingdom, so we’re well-placed to play our part in this important market.
Best Best Digital Digital Bank Bank In In KSA KSA
96% of NCB banking transactions in 2017 96% of NCB banking transactions in 2017 were completed through Digital Channels were completed through Digital Channels www.alahli.com | www.alahli.com |
| 9 2000 1000 | 9 2000 1000
IBDA issues new debit and credit cards in the time it takes to drink a cup of coffee.
You posted record operating profit for 2017 at SAR 2,446 million, up 4.1 per cent. It was a very challenging year— how did you manage this outcome? A combination of slightly higher revenue and well-controlled cost. Yes, it was a challenging year, resulting in lower nonfunded income, offset by better than expected funding conditions. The results showed the strength of the bank’s core businesses, solid relationships and good service. What is your view of the banking and finance landscape in KSA as we come to the end of Q1 2018? Overall, I would describe the banking landscape in the Kingdom as safe and sound. Banks are well-capitalised, liquidity is healthy and we have good and proactive regulators.
2017 was somewhat of a tough year and I think most banks will agree the current level of economic activity is a little slower than we would like it to be. I suspect we will see that continue throughout most of the year.
I STRONGLY BELIEVE THAT WITH MORE GENDER BALANCE WE WILL HAVE BETTER DECISION MAKING IN BUSINESS. Soren Kring Nikolajsen, Managing Director at Alawwal Bank
Alawwal Bank was indeed the first bank operating in KSA—how has it shaped Saudi Arabia’s financial landscape? What is the bank’s focus for 2018 and how does this fit into the Kingdom’s economic growth agendas? The history of Alawwal Bank is rich enough to fill a whole book, going all the way back to a young Prince Faisal’s visit to the Netherlands in 1926. From helping the Kingdom to issue its first currency, to facilitating the first payment for an oil transaction, there have been many historical moments where the bank has played a key role.
At 2017 year-end the bank had a Core Tier 1 equity ratio of
and total capital of
Source: Alawwal Bank
balance we will have better decision making in business. For a bank, I also think it is vital our organisation mirrors the diversity of our customer base to stay in tune with their needs.
IBDA customers enjoying the user-friendly self-service screens.
I’m proud to say our spirit of innovation is just as strong today, evidenced by our support for many of the country’s largest companies, to playing a leading role in the digital evolution of the Kingdom’s banks. That focus will not change in the year ahead. What are your long-term plans to align the bank with the Government’s Vision 2030 programme? Aligning with Vision 2030 isn’t just about the long-term, it’s also about the here and now. Vision 2030 looks at many aspects of society and business that we can, and will, play an active part in. Vision 2030 creates exciting opportunities for our business. As a bank, it is our role to provide financial tools to support business growth and the economy, so it is critical we get behind these initiatives. Take the entertainment sector as an example, a
total of $64 billion is being invested over the next 10 years—we need to be ready to support the business growth this will generate. Creating a savings culture and improving financial literacy are other areas of focus. The Government is absolutely right to make personal savings part of their agenda. With such a young population as in the Kingdom, we need to do more to encourage young people to save for the future. It’s in everyone’s interests to make sure they do not face financial difficulties in the future. We also see huge value in increasing women’s participation in the workplace. This is something we are already doing at Alawwal Bank and are seeing the benefits of. It makes good business sense to encourage diversity in any workforce. I strongly believe that with more gender
The IMF is expecting GDP growth in KSA to be close to zero for 2017 and looking to the whole of 2018, credit demand is expected to weaken in KSA, partly on the back of reduced Government spending. Do you foresee any issues as a result of this? Lower economic activity means fewer business opportunities for the banking industry. We will have to watch our cost base and of course pay very close attention to credit performance in an environment of slower economic activity. We will only maintain our value as a bank, and to our customers, if we maintain our position as a responsible lender. The Saudi Arabian Monetary Authority joined AAOIFI as an institutional member in October last year. Is the likely adoption of AAOIFI standards going to create more opportunities for Alawwal Bank in Shari’ah-compliant finance both nationally and internationally? Common standards for Islamic finance products would be very helpful. A wide range of standards and interpretations is a significant road block for a broader acceptance of Islamic finance globally in my view. As for Alawwal Bank’s business in the Kingdom I would welcome a common set of standards.
IBDA cafe creates a social space for customers to do their banking.
In September last year, Fitch Ratings affirmed Alawwal Bank’s long-term issuer default rating (IDR) at ‘BBB+’ with a stable outlook. But Fitch also said that the bank’s viability rating was ‘constrained by the bank’s limited core capital buffers and uncertainty over its ability to raise new equity due to the foreign shareholder’s desire to exit its shareholding.’ How do you react to that? Alawwal Bank’s capital level is strong and more than sufficient to support any current growth ambition. At 2017 year-end the bank had a Core Tier 1 equity ratio of 16.2 per cent and total capital of 20.3 per cent. We are not constrained by capital in any way. What can you say, if anything, regarding the merger talks with SABB [that could create the third largest bank in KSA] that were revealed in April last year—is there a clear timetable for conclusion? I cannot comment on the ongoing discussions. This is an extremely
important decision for the two banks and a potentially transformational event for financial services in the Kingdom. It is therefore very important that whatever we decide is done for the right reasons.
WE ALSO MUST BE CAREFUL NOT TO GET CARRIED AWAY BY THE HYPE AROUND NEW TECHNOLOGIES. WE SHOULD BE THINKING ABOUT WHAT PROBLEM IT IS WE NEED TO SOLVE, THEN LOOKING AT WHAT TECHNOLOGY IS AVAILABLE TO SOLVE IT—NOT THE OTHER WAY AROUND Soren Kring Nikolajsen, Managing Director at Alawwal Bank
Being in a “new era” [in all its meaning for the sector and market], how do you envision the business of banking changing in Saudi Arabia over the next five years? I see changes from two aspects. Firstly, technology will play a big role in changing banking. That goes for the customer facing side as well as on internal processes. With the right use of technology, we become more efficient and can lower our cost base in the process. Second, are the economic changes in the Kingdom with Vision 2030 and the move towards a private sector led economy. That represents challenges but also significant opportunities for Saudi banks.
At the heart of Riyadh’s largest mall, IBDA opens twice as many new accounts as Alawwal Bank’s busiest traditional branch.
SAUDI ARABIA’S OLDEST BANK SHAPES THE FUTURE OF DIGITAL BANKING Having launched the IBDA Cafe concept last year, how has it been recieved by the market? We did not want IBDA to be one of those digital concept branches that attracts headlines but no customers. Our priority was to create something our customers would enjoy and made good business sense. The traditional branch banking approach hasn’t changed much over time but consumer behaviour has. Over the past decade the smart phone has changed our expectations as consumers. We are more used to doing things ourselves with the swipe of a screen than waiting to be served. Today the experience you offer is just as important as the quality of your products and services. IBDA was an opportunity for us to challenge the status quo, focusing purely on creating the best possible experience for a bank branch, then looking at the best available technology to help us do that. With IBDA it was all about doing things on the customer’s terms—not ours. Setting the branch in a cafe environment changes the whole experience. It becomes a social space where you can do something enjoyable as well as your banking. We’ve replaced counters with coffee tables and self-service screens, there is also an interactive kid’s play area. You only need to speak to a member of staff if you request to do so on one of the devices. We’ve also digitised our processes behind the scenes to offer a range of faster online services. At IBDA you open a new account or credit card in the time it takes to drink your coffee. We are learning a lot from IBDA and welcoming a lot of new customers to the bank in the process. What a branch in the future will look like I’m not sure but it will be closer to IBDA than the traditional model, that I can be certain of.
How should banks adapt to customer expectations for digital banking? The time when digital was optional is long past us. It is more a question of how fast we can develop services to match the expectations of an increasingly demanding customer. That is particularly the case here in the Kingdom with such a young and very tech savvy population. I think banks across the region need to work much harder at digital transformation. Yes, we are very complicated businesses, which makes creating simple digital solutions much harder, but we cannot use that as an excuse. Like many traditional businesses, banks have often made the mistake of creating a separate digital strategy, when what they actually need is a strategy that works in a digital world. The whole organisation needs to be thinking about how we can make our services more relevant in an increasingly digital world—that cannot be left to one team. We also must be careful not to get carried away by the hype around new technologies. We should be thinking about what problem it is we need to solve, then looking at what technology is available to solve it— not the other way around. Instead of racing to be first to use a certain technology, we need to design services around genuine business and customer needs. There are many benefits to be had from digitising the bank. Not only does it make our services more accessible, it also generates data that helps us better understand our customers and offer them better services. That alone should be reason enough to make digital a priority. We’ve invested heavily in our digital proposition and the response from customers has been amazing. In 2017, our total mobile and online banking transactions increased by over 50 per cent. Digital is important to our customers, so it is important to us. We may have gotten ourselves into a market leading position in this space but that will quickly be lost if we do not continue to invest further in it. If we want to continue to be relevant for our customers, we have to be agile to their needs and embrace the new levels of convenience the digital world offers.
For generations, the better way to bank. Over 40 years ago, Dubai Islamic Bank pioneered a way of banking that was truly better: Islamic banking. Since then, many generations of customers continue to enjoy world class products and services backed by the very latest in banking technology. For them as for you, this is still the better way to bank.
DARKEST BEFORE DAWN? For many years, Iraqi citizens have felt that the only way is upâ€”and analysts are finally starting to agree PHOTO CREDIT: Shutterstock/lkpro
il is both Iraq’s biggest strength and weakness. It has been the lifeblood of the economy since the country’s first productive well was drilled in 1927, and there has been little diversification since. BLACK TO THE FUTURE According to the BP Statistical Review of World Energy, Iraq’s proven oil reserves were 153 billion barrels, the fifth-largest in the world, equivalent to nine per cent of global proven reserves at the end of 2016. Moody’s says that oil accounts for about 50 per cent of nominal GDP, nearly 100 per cent of exports, and around 90 per cent of government revenues. However, because oil extraction is a capital-intensive industry it has done little to boost employment and spread wealth among the citizens of Iraq; it accounts for only one per cent of total employment. Hence, lower oil prices have ravaged Iraq’s finances. Black gold has traditionally provided approximately 95 per cent of
foreign exchange earnings, so when prices halved in 2014 Iraq’s Government found itself staring into a void. With skyrocketing security bills and higher humanitarian outlays, the fiscal and external balances in the Federal Government of Iraq and the Kurdistan Regional Government have been deteriorating since 2014. Moody’s estimates that Iraq has moderate fiscal fundamentals, with a debt burden that is expected to stabilise at around 60 per cent of GDP. The IMF anticipates a very large nine-percentage point deficit reduction in 2017. However, both scenarios are almost entirely dependent on oil revenue increases. Government non-oil investment has declined by two-thirds, starving the agriculture, manufacturing and construction sectors of vital funds. While strong oil production picked up the slack in 2016, the World Bank predicts that the OPEC agreement to cut production until March 2018 is expected to lead to a contraction.
At the end of 2016 Iraq’s proven oil reserves were
barrels 5th largest in the world equivalent to
of global proven reserves PHOTO CREDIT: Shutterstock/Everett Historical
Source: BP Statistical Review of World Energy
I NDUSTRY A WARDS 2018
SAVE THE DATE
3 . 5 . 18 The Ritz Carlton, DIFC, Dubai, UAE 7pm cocktail reception followed by dinner and the awards ceremony
I N A S S O C I AT I O N W I T H
S T R AT E G I C PA R T N E R
According to Moody’s, developments in the oil industry put a brake on growth in 2017 when GDP growth contracted 0.4 per cent. This is a dramatic fall from 2016 when GDP growth surged 11 per cent on the back of improved oil production. Looking ahead, the rating agency predicts that growth between now and 2022 is likely to slow. After a growth rebound of 2.9 per cent for 2018, the IMF is forecasting that real GDP growth will be between 1.7 per cent and 2.1 per cent through 2022. THE BRIGHT SIDE While this may paint a fairly pessimistic picture, analysts are quick to point out that it isn’t all bad. Iraq still holds substantial resources and plenty of potential for growth and development. GDP growth held up surprisingly well in the face of an expensive military campaign against Isis, and the government has very significant reserves that total around $40 billion. Growth is set to accelerate in 2018 by virtue of higher oil production and generous international financing. The World Bank expects that improved security and reconstruction efforts will sustain non-oil growth in 2018. In fact, non-oil growth is predicted to turn positive after a three-year decline, despite the ongoing fiscal consolidation. This is thanks to construction and services on the supply side, and pickup in government consumption and investments on the demand side. The government’s reform effort—but not reconstruction—is supported by a large financing package courtesy of a deal with the International Monetary Fund (IMF). The deal is a result of the Stand-By Arrangement (SBA) and, according to the IMF, Iraq is delivering on its side of the bargain. In the fiscal area, the authorities are implementing a sizable fiscal adjustment, mostly through retrenchment of inefficient capital expenditure while protecting social spending.
The Iraqi Kurdistan regional independence referendum was held on 23 September 2017, Erbil, Iraq.
IRAQ’S RECENT POSITIVE DEVELOPMENTS MUST BE WEIGHED AGAINST THE FRAGILITY OF THE COUNTRY’S OVERALL POLITICAL, ECONOMIC, AND FISCAL POSITION. The peg of the Iraqi dinar to the US dollar continues to provide a key anchor to the economy. However, the IMF admits that performance under the SBA has been weak in some key areas. According to Moody’s, performance has been mixed under the arrangement and this raises broader questions about governance and policy effectiveness. Further fiscal adjustment will be required to keep the programme on track, the rating agency said. However, the IMF argues that understandings have been reached on sufficient corrective actions to keep the programme ticking along. “The composition of the fiscal adjustment should be improved over
time by increasing non-oil revenue and reducing current expenditure,” the IMF said in a report. “In addition, reforming the electricity sector and state-owned enterprises will make room for larger and more effective investment expenditure that supports growth and job creation.” COMBATING CORRUPTION Significantly improving public financial management will be important, the IMF warned. Arrears need to be assessed and paid, and expenditure commitment and cash management should be strengthened to prevent the accumulation of new arrears. This isn’t easy when Iraq has some of the weakest Worldwide Governance Indicator scores in Moody’s rated universe, according to the rating agency. Corruption is endemic and contributes to deep-seated dissatisfaction with the government and, ultimately, undermines the country’s political stability and hence policy effectiveness. Policy effectiveness is accordingly mixed. According to the 2004 Central Bank of Iraq (CBI) law, the central bank is independent from the government.
The CBI’s primary objectives are domestic price stability and a stable and competitive market-based financial system. The CBI has ostensibly been successful in reducing inflation rates to low levels in recent years. Moody’s notes that public financial management is a particular area of weakness for Iraq and is, therefore, a key component of the SBA targets. Iraqi data also have significant shortcomings. While detailed monthly oil sector data are available, the analysis of the non-oil sector is hampered by the lack of high-frequency activity indicators and quarterly expenditure-side national accounts data. Quarterly balance of payments data is only available with very significant lags.
Iraq’s banks are also among the least developed in the Middle East. According to World Bank data, a mere 11 per cent of the country’s population has a bank account. It is hardly surprising that Iraq’s long-suffering citizens feel that their money is safer under a mattress than in the hands of a banker. TAXING PROBLEMS Unfortunately, this means Iraq’s plans to plug a hole in its finance by introducing an elaborate tax regime will be nearly impossible to implement. The new tax policy is the result of Iraq’s 2015 agreement for a $5.4 billion loan with the IMF. The deal includes a reform of public finances to collect $1.8 billion under the 2018 budget through taxes.
In the fourth draft of the 2018 budget bill, a 10 per cent tax on sales at commercial centres, restaurants and barbershops was proposed. However, because cash remains king in Iraq, it will be easy for businesses to continue to evade tax, and for collectors to line their own pockets rather than the Government’s purse. IFC, a member of the World Bank Group, and the Central Bank of Iraq have been collaborating to raise corporate governance standards in Iraqi banks and strengthen the country’s banking sector. IFC’s advisory services team have agreed to support the Central Bank in implementing its new mandatory corporate governance banking guidelines.
The World Bank expects that improved security and reconstruction efforts will sustain non-oil growth in 2018.
GROWTH IS SET TO ACCELERATE IN 2018 BY VIRTUE OF HIGHER OIL PRODUCTION AND GENEROUS INTERNATIONAL FINANCING. For companies operating in conflictaffected environments, strong corporate governance can be vital for sustainability. “Our aim is to foster a positive corporate governance culture within which banks in Iraq can operate, to strengthen the sector and drive growth,” said Ziad Badr IFC Principal Country Officer in Iraq. “Improved practices help attract direct investments and ultimately stimulate social welfare and economic growth.” Other measures to bolster financial sector stability include strengthening the legal framework of the Central Bank of Iraq, restructuring state-owned banks, and eliminating an exchange restriction and a multi-currency practice. Measures to prevent moneylaundering, counter terrorist financing and strengthen the anti-corruption legislation are also on the cards.
PHOTO CREDIT: Shutterstock/rasoulali
IFC will initially train all key managers in the Central Bank and then roll out workshops to board members from all the country’s banks. Aly Al Alaq, Governor of the Central bank said, “Helping banks implement sound corporate governance practices will increase the sector’s resilience and sustainability and make them more investment-friendly, enabling banks to not only boost efficiency, but also increase profit.” The initiatives are part of IFC’s strategy to spur private sector growth in Iraq and scale up support for fragile and conflict-affected states, where private sector investment is key.
MUTUAL BENEFITS There is also optimism surrounding the budget-sharing agreement with the Kurdistan Regional Government, which would put both the federal Government and the Kurdistan Regional Government in a better position to soothe shocks to the Iraqi economy.
With a rebound growth projection of
for 2018, the IMF forecasts real GDP growth in Iraq to be between
1.7-2.1% through 2022
Economic relations between the Iraqi Central Government and the Iraqi Kurdistan region appear to be gradually returning to normal, according to FARAS. The UAE think-tank says that there has been a positive shift in economic exchange between the two sides, after relations were badly shaken by the landmark referendum on independence in September 2017. It is imperative that both sides restore minimal relations. The Kurdistan Government undoubtedly needs financial support through the annual budget allocations to Kurdistan. Kurdistan’s oil exports fell more than 50 per cent due to tensions with Baghdad triggered by the referendum, which put more financial pressure on the region’s government. RATING IRAQ Analysts are certainly heartened by recent developments. Last summer, international credit rating agencies Standard & Poor’s, Fitch and Moody’s all upgraded the country’s outlook to stable. However, they all issued the same dire warnings. While the country has a relatively large economy endowed with substantial oil wealth, it suffers from highly volatile growth due to its lack of economic diversification. Political and security risks are very high, driven by underlying ethnic and sectarian tensions, and by Iraq’s location within an unstable region. Moody’s notes that even if dissolution or disintegration of the country is unlikely, the combination of domestic and geopolitical risks affects the Government’s capacity to service its debt. Iraq’s recent positive developments must be weighed against the fragility of the country’s overall political, economic, and fiscal position. Oil has indeed been a mixed blessing for Iraq. While oil has brought Iraq untold riches, it has left the country with an empty chest at a time when Iraq needs all the financial ammunition it can muster.
12 Hawkamah Annual Conference th
April 30, 2018 - Dubai
Navigating Transformation and Disruptions: Overcoming Governance Challenges
Enabled by government support, technological innovations are disrupting traditional business models pushing boards and executives to re-think and transform their approaches to cope with such a dynamic landscape. Hawkamahâ€™s 2018 conference will explore the impact that these transformations and disruptions will have on how companies are governed. How can organizations align their decision making to match the increasing speed of change? How can Boards of Directors drive transformation and foster innovation within their businesses? How can transformation and innovation be encouraged and monitored? Join us. Debate the future. Now.
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IRAQ in numbers POPULATION
Source: Worldometers; United Nations estimates (March 2018)
$179.8 $171.7 $192.7 $202.9
billion (2015) billion (2016) billion (2017) billion (2018 est.)
Source: International Monetary Fund
GDP REAL GROWTH RATE
-0.4% 11% 4.8%
(2016 est.) (2015 est.)
Source: Worldometers (February 2018)
NON-OIL REAL GDP (PERCENTAGE CHANGE)
(2017) (2018 est.)
Source: International Monetary Fund
FINANCIAL INDICATORS TOTAL GOVERNMENT DEBT
$98 $114.6 $122.9 $132.6
billion (2015) billion (2016) billion (2017) billion (est. 2018)
Source: International Monetary Fund
Source: CIA World Factbook
2.9% Saudi Arabia’s GDP is expected to grow 2.9% in 2018 Source: Moody’s Investors Service
GDP PER CAPITA
$17,000 $17,500 $16,200 Source: CIA World Factbook
(2017 est.) (2016 est.) (2015 est.)
$53.7 $45.2 $41.4 $40.8
billion billion billion billion
Source: International Monetary Fund
GREEN SUKUK: DRIVING ISSUANCE IN THE GCC Green Islamic finance fuelled corporate and infrastructure Sukuk issuance in the GCC last year. Michael Wilkins, Head of Sustainable Finance at S&P Global Ratings, considers the opportunities in the region for the year ahead
THE GLOBAL RISE IN GREEN INVESTMENTS The green finance space has grown exponentially over the last decade— predominantly led by labelled green bonds. Where the green bond market totalled $11 billion outstanding in 2013,
last year saw close to $160 billion of greenlabelled issuance alone, according to the Climate Bonds Initiative (CBI). Trends this year could break records once again: S&P Global Ratings estimates the labelled green bond market to grow by 30 per cent, reaching a total of $200 billion in 2018. Yet green bonds aren’t the only green financing tool available. As the market seizes new business opportunities within the green space, S&P Global Ratings has observed the development of new sustainable financing instruments. For example, green lending and green securitization have been rising over the past two years—reaching close to $36 billion in 2017. Green loans include those that finance projects involving some form of environmental benefits; whereas green structured products have green underlying collateral or assets or reinvest their proceeds in green technologies. America is taking the lead in the green securitisation market, supported by existing state and government programmes as well as positive momentum in collateralized loan obligations and mortgage-backed
securities (MBS) issuance. Notably, the rise of green structured products in 2017 was driven by the US issuer Fannie Mae’s $25 billion MBS programme, which aims to improve the energy and water performance of US properties. Despite the current geographic concentration in the structured green products market, there is potential for green lending across a broader range of geographies and types of financings. In the GCC, demand could be met by the nascent green Sukuk marketplace. THE EMERGENCE OF GREEN SUKUK FOR RENEWABLE ENERGY The CBI defines green Sukuk as Shari’ahcompliant investments in renewable energy and other environmental assets. These financings address Shari’ah concern for protecting the environment. Proceeds are used to finance construction, to refinance construction debt, or to finance the payment of a government-granted green subsidy. The first green Sukuk in the infrastructure market was issued in July of 2017. Tadau Energy, a unit of China-owned
PHOTO CREDIT: Shutterstock/Wang An Qi
he GCC faces high spending requirements on two fronts. Infrastructure projects require approximately $120-150 billion between now and 2019; while refinancing corporate capital market debt also demands $23.6 billion, due before 2019. Yet, alongside rising infrastructure and financing needs, there are a number of positive offshoots emerging that can bolster market growth. Of these new developments, green Sukuk—the Shari’ah-compliant alternative to green bonds—have perhaps the most potential to increase total issuance in 2018. When two green Sukuk were issued last year, totalling the equivalent of $321 million, the wider marketplace took note. Now Indonesia has issued the first sovereign green Sukuk, raising $1.25 billion.
TRENDS THIS YEAR COULD BREAK RECORDS ONCE AGAIN: S&P GLOBAL RATINGS ESTIMATES THE LABELLED GREEN BOND MARKET TO GROW BY 30 PER CENT, REACHING A TOTAL OF $200 BILLION IN 2018. Michael Wilkins
Edra Power Holdings, issued a Sukuk for Malaysian ringgit (MYR) 250 million (c. $ 63 million). Proceeds from the issuance— known as Green SRI (socially/sustainably responsible investment) Sukuk Tadau— will finance a large-scale solar project of 50 megawatts (MW) in, Sabah, Malaysia. Perhaps indicative of a coming trend, Green SRI Sukuk Tadau was followed late last year by a second green Sukuk issuance. Quantum Solar Park (another Malaysian entity) raised MYR 1 billion for solar PV power plants with a combined expected capacity of 50MW. Together, these issues contributed to the total of $51 billion committed to renewable energy projects last year (CBI). As renewable energy projects continue to proliferate in 2018, there is potential scope for further green issuance in the GCC region. A NEW FINANCING FINDS ITS FEET However, there is no natural GCC investor market for green finance. S&P Global Ratings thereby expects GCC issuers to combine green and Sukuk features as they attempt to tap liquidity pools available in both green and Sukuk markets.
A number of local utilities might consider green issuance, but in order to proceed they’re likely to expect to obtain pricing at least equivalent to conventional bonds. In fact, there is a growing anecdotal evidence of tighter spreads for green bonds in the primary market, when compared to their conventional (non-green) counterparts. This can be attributed to strong demand and opportunistic pricing. For example— from data collected in the CBI’s sample— the spread benefit for USD corporate green bonds was on average 12.1 basis points (bps) vs Initial Price Talk (IPT). On the other hand, vanilla bonds saw a benefit of 10.2bps on average during same period. Whether green Sukuk could enjoy the same kind of pricing premium is unclear. But there is no doubt that green financings typically attract a more diversified investor base, which may in turn lower the cost of funding. MORE POTENTIAL WITHIN THE INFRASTRUCTURE MARKET Sukuk issuance has generally been low in the GCC. This is because the landscape
remains small and undifferentiated; only a few corporate and infrastructure entities currently issue Sukuk in the region. 2017 saw the majority of Sukuk issuance represented by Saudi Aramco, Emaar, and Ezdan, with most of the issuance occurring in the second quarter. Given the limited pool of main issuers, any additional Sukuk issuers that tap into the capital markets could significantly increase overall volumes. Mid-sized issues—between $20 million and $100 million, for example—may offer the most likely path for growth of the market. These financings, executed over several tranches, could fund projects such as rooftop solar. Over time, this sort of financing may be done on a portfolio basis, or as capital market bundling financing. For smaller-scale financings in the green market to develop, containing transaction costs will be crucial. Therefore, regulatory frameworks that have been tried previously and have supported the European market, such as the feed-in tariff—as well as standardisation of power purchase agreements (PPAs)—could aid growth in the GCC. With the first green Sukuk ever issued last year, and a handful since then, there is likely to be more in 2018. And given that Sukuk issuance is a relatively nascent asset class in its own right, increased green Sukuk could lead to the development of Sukuk issuance overall in the GCC—helping the region to realise its infrastructure needs.
VIRTUAL ACCOUNT MANAGEMENT:
A MAJOR OPPORTUNITY TO STREAMLINE YOUR ACCOUNTS RECEIVABLE AND IMPROVE OPERATIONAL EFFICIENCY By Amol Bahuguna, Head of Payments and Cash Management at Commercial Bank of Dubai
ccounts receivables (AR) is perhaps one of the most critical processes and of the most challenging operational activity for any corporate, as evidenced through various studies. One of the main reasons for this is due to the fact that, improper AR management could lead to unhealthy cash inflows, severely impacting the dayto-day operations and even leading to possible closures in some drastic cases. Treasurers understand that they are less in control of cash receivables as compared to cash payouts, and with the increasing risk management challenges in handling AR, treasurers are therefore looking for long-term solutions to create efficiency within their processes and overcome operational challenges. Corporates with multiple banking relationships and multiple accounts across different banks due to financing obligations, are now negotiating with their banking partners on a need to rationalise complex accounting structures and possibly offer an efficient AR solution. Post the 2008 financial crisis, local banks have realised the benefits of offering cash management products and services to their clients, enticing them to invest in sophisticated technology related solutions. Virtual accounts management is one such solution. It helps a corporate treasurer create, manage and monitor their receivables from various counter parties into
a single concentrated account, allowing 100 per cent identification of the payer, lowering day sales outstanding, reducing operational challenges and many more. Virtual account management also offers a bespoke dashboard to view account information, statements and reporting modules, and is generally part of an integrated receivables management solution offered by banks. To put it in simple terms, virtual accounts are a series of dummy accounts mapped to a real current account of a corporate, which can be used by treasurers to manage their day-to-day working capital cycle. Virtual accounts offer most of the capabilities of a real bank account, except for the associated administrative workload and costs of a real current account. The implementation of this solution does require significant time and effort from both banks and corporates, but it offers immediate benefits.
Treasurers have started to create value for the company’s shareholders by eliminating the need for several bank accounts and in turn reducing counterparty risk, external bank charges and the administrative effort required to manage several accounts. Furthermore, leveraging a virtual account solution can help automate the process of reconciliation, thereby enabling corporates to credit customer accounts promptly in its enterprise resource planning (ERP) or treasury management system (TMS). To properly implement a virtual account solution, treasurers must first thoroughly review the business case and float a detailed request for proposal (RFP) to prospective banks, with clearly defined scope and expectations. It has also been suggested that it is best to involve their existing lending banks, even if they may not have the capabilities. This is to avoid any misunderstanding which may impact future financing requirements for the corporate. Some of the key decision factors must include domestic capabilities, virtual IBAN for inward remittances, outward cheque clearing, intra-day visibility of balances, account reconciliation facilities and more. Virtual account management is suited for businesses of all sizes. There are immense benefits and quick impact from having full visibility and control on customer payments. Some of the key positive impacts of virtual account management include: • Recognition of payer(s); • Improved days sales outstanding (DSO) and control over cash; • Reduced operational costs; • Improved visibility on cash forecast; • Prudent credit risk monitoring; • Reconciliation of accounts. Many banks offering virtual accounts are unlikely to let the concept rest without further developing next generation capabilities to add into the overall value proposition. An inter-company loan is a concept that banks have started work on to help customers optimise their current cash resources.
UNLOCKING CARDLESS ATMS Mike Lynch, Chief Strategy Officer at InAuth says that mobile device security is key to the success of cardless ATMs
anks worldwide are continuing to create better customer experiences, reduce cost and mitigate fraud. Focusing on new ways to service customers continues in the ATM channel. For example, new capabilities in ATMs allow customers to be helped via a live teller at the ATM using video banking. Another type of innovation is the cardless ATM process. A number of major financial institutions are deploying cardless ATM capabilities, allowing customers to withdraw money from an ATM using a mobile app to initiate the transaction. Banks are taking a number of different approaches to cardless ATMs transactions, including requesting a one-time code via their banking app that the customer inputs into the ATM to complete their transaction.
PHOTO CREDIT: Shutterstock/wk1003mike/Shutterstock
Mike Lynch, Chief Strategy Officer, InAuth
Another method involves sending a QR code to the mobile device that is then read by the machine to complete the transaction. And a more sophisticated process involves a customer loading debit card details into an existing â€˜xPayâ€™ mobile wallet (i.e. Apple Pay, Google Pay and Samsung Pay) and then using the nearfield communications (NFC) tap-and-pay technology built in to the mobile device at the ATM in conjunction with a PIN. Some financial institutions are employing a seemingly riskier technique where cardless cash codes are sent to recipients for ATM withdrawals.
The number of payment cards compromised in ATMs and merchants across the US rose
70% in 2016
Cardless ATMs are certainly a way to improve the customer experience by eliminating the need to carry and replace cards, which can be easily lost or compromised, as well as reduce the cost to the institution to replace them. And cardless ATMs should help eliminate skimming, which is the use of a physical device that fits over the existing card reader to scan and store your card information. But as with any emerging technology, financial institutions should take caution to not open a security loophole that could increase fraud activity. Using history as an example, cardless ATM fraud was seen as early as 2012 in the UK with one of the first pioneer cardless ATM products. The ATM channel has been such an area of pervasive fraud and fraudsters may be highly motivated to find a way to continue to commit fraud on this channel, even if cardless ATM systems are deployed. According to FICO, the number of payment cards compromised in ATMs and merchants across the US rose 70 per cent in 2016. Done securely with cardless ATMs, this number may decrease. But, with inadequate security, some institutions may see an increase in ATM fraud in the short term. As the mobile device takes on an increasingly higher profile role in facilitating financial transactions of all types, financial institutions must increase their focus on the device itself as part of their security strategy. In many cases, the security protocols underlying mobile transactions still unfortunately rely on vulnerable and outdated username and passcode protocols, as well as app-generated one-time passcodes which can also be easily intercepted and exploited by fraudsters. And vulnerabilities such as Crimeware, which is malware devised for financial loss, can also be present on the device and target customer account information for future fraud attempts.
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Organisations must ensure innovations in cardless ATMs are implemented with the latest security advances possible in order to avoid embarrassing and costly security breaches. In one known fraud example, a bank customer was defrauded as a result of a cybercriminal gaining access to her mobile banking login credentials which they then used to register a new mobile device for cardless ATM access. This situation caused both a financial loss and reputational damage, as the fraud incident became part of a media story. Security solutions currently exist that can help identify legitimate customers using a multi-factor authentication (MFA)-based approach, and device and transaction risk assessments that do not compromise the user experience, including authenticating the device being used to conduct the transaction. When these solutions are implemented along with common-sense operational policies and procedures, the risk of fraudulent cardless ATM access can be greatly mitigated. In the fraud case above, an attempt to access the mobile banking application on a device never previously used by that account owner should have triggered a step up authentication challenge. Financial institutions should consider security tactics to help combat fraud targeting cardless ATM transactions at the point of access (the mobile device), including mobile fraud detection with real time decisioning, biometrics and a permanent device ID. BEST PRACTICES IN MOBILE SECURITY Real time decisioning is a critical part of a mobile fraud prevention solution as it provides the ability to detect many different types of risks inherent in mobile access to ATM transactions. The ability to stop attacks on the device before it transacts with the bank helps reduce friction for customers, while still providing superior security by providing financial institutions the ability to flag suspicious access attempts for additional scrutiny.
A MOBILE SECURITY STRATEGY MUST ALSO SECURE THE DEVICE ON WHICH CARDLESS ATM ACCESS IS BEING REQUESTED AND INITIATED. Mike Lynch, Chief Strategy Officer, InAuth
Many financial institutions have added biometric identification to their authentication flows as a more secure way to establish the identity of their customers. The increasing availability of built-in biometrics capabilities on mobile hardware presents an opportunity to retire outdated username and password methods for confirming a userâ€™s identity. Biometrics are also quickly becoming the preferred method of authentication among consumers themselves, who view it as more convenient and more secure way to establish their identities. However, biometrics alone are not the one-size-fits-all solution for mobile transaction security. The biometric login by itself only proves that the enrolled user is attempting access. The login authentication alone does not ensure
the security of the device the biometric operates on. A mobile security strategy must also secure the device on which cardless ATM access is being requested and initiated. Organisations should also utilise fraud detection capabilities that identify evidence of malware, malicious/ tampered applications, key loggers, SMS forwarders, or other fraud tools used by criminals to defraud customers and hijack their account. A permanent device ID is a way to identify a device using its unique attributes in order to establish the first layer of trust by fulfilling the â€œsomething you haveâ€? factor in a multifactor solution. Establishing a device as trusted provides financial institutions with the confidence they need to allow good customers to transact with the least amount of friction, while at the same time, allowing institutions to consider an unknown device for a particular customer to be higher risk and potentially challenged with another authentication step, or denied if other high risk indicators are present. This helps protect both the true customer and the financial institution. Behavioural analysis ensures the device is one that is typically associated with the customer, ensures the ATM transaction activity is typical for this customer, and that the location makes sense for this particular customer. There are many other combinations of rules that a financial institution can employ to gain insight into whether this is likely the true customer. Deploying a mobile-specific security strategy that includes solutions to authenticate both users and the device being used to initiate access to cardless ATMs, along with sound operational policies and procedures that keep customer and organisational risk always at the forefront, will help this promising technology usher in a new era in the continuing quest to enhance the customer experience though unparalleled convenience and access.
Kaspersky Enterprise Cybersecurity
Mission Undefraudable Kaspersky Lab Middle East Arenco Tower, Office 2201 Dubai Internet City Dubai, United Arab Emirates +971 4 559 0800 ÂŠ 2018 AO kaspersky Lab. All rights reserved. Registered trademarks and service marks are the property of their respective owners.
DIGITAL TRANSFORMATION IN A HIGH-TECH ECONOMY Laurent Lemaire, Chairman and CEO of Elseco, a Dubai-based risk management and insurance underwriting firm, sits down with Banker Middle East, to discuss the challenges and opportunities for providing aviation, space and energy insurance in the high-tech world
an you set the scene for insurance innovation generally and where does the UAE and the region stand in its insurance innovation? Our world is undergoing rapid technological change, and insurers and their customers need to innovate and adapt to keep pace. At the world level, insurance innovation has been seen mainly on: (a) Distribution: using the internet and mobility to distribute insurance more cost effectively; (b) Data/Internet of Things: Knowing risk better allowing insurers to offer more competitive prices; (c) Artificial intelligence and machine learning: using technology to better analyze trends, respond to customers, fine tune pricing, understand trends and correlations, and optimize customer experience; and finally (d) Claim: using decentralization, satellite data, and smart contracts within blockchain to simplify claim processing. As a result of certain public-sector initiatives, such as DIFC Fintech Hive and the Smart Dubai initiative that leverages blockchain, I am confident that insurance innovation is coming soon to the region.
PHOTO CREDIT: Shutterstock/IM_photo
Space is a high-growth field, with increasing planetary missions, launching satellites, and even space tourism. How do space policies need to be updated in this era? Let’s use satellites as an example. Orbiting the earth are hundreds of satellites that are beaming our television shows and video conferencing calls, guiding directions on the map apps on our smartphones, and monitoring our weather, to name but a few applications. Satellites are essential parts of our daily lives, the global satellite industry generated revenues in 2016 in excess of $350 billion.
In the satellite field, satellite manufacturers, operators, launch service providers, space agencies, and telecommunications companies all need insurance to protect their balance sheet and, in the case of start-ups, to give investors the confidence to invest. Policy cover ranges from pre-launch to the launch through protection while satellites are in orbit and potentially up to the point where they are deorbited. Now, satellite players are increasingly concerned about the risks from cyberthreats. This fear has moved from the realm of ‘if’ to ‘when’ an attack will happen—not just against the spacecraft themselves, but also against the ground stations and their systems. Insurance coverage is adapting to this changing environment to enable the continued growth in the new era of space missions, space transportation, and space travel. Cyberrisks are just one of the examples of changes the industry is experiencing and that have, or will have in the near future, impacts on space insurance policies. The development of so-called mega-constellations comprising thousands of satellites, the use of on-orbit servicing missions, capable to inspect, refuel, repair, or even upgrade satellites which have been launched, commercial orbital and sub-orbital manned missions, manufacturing facilities operating from orbit to benefit from micro-gravity or even asteroid mining are examples of such fundamental changes experienced by our sector. Existing insurance products will need to adapt, and new product created, to support the evolution of the space industry, but defining exactly how would be guesswork at this stage. We are fortunate to be located in the United Arab Emirates where space is a strategic pillar for the country.
Laurent Lemaire, Chairman and CEO, Elseco
In addition to being home to innovative satellite companies such as Yahsat and Thuraya, leading satellite design and manufacturing facilities based in the Mohammed Bin Rashid Space Center and an active UAE Space Agency, UAE recently announced the Emirates Mars Mission, which aims to send a spacecraft to Mars by 2021, and the Mars Science City, a AED 500 million project to build the world’s largest spacesimulation city in Dubai. Each initiative has risks and insurance can play a role in mitigating them. Based on recent statistics, air travel is one of the safest ways of travel. Why should aviation players be concerned about having the right insurance policies? You are correct when you state that aviation is one of the safest ways of travel. But do not believe that it reduces the need for insurances. The values of aircraft and cost of repairs are constantly increasing, making every
accident potentially more expensive. Strangely, the lowering frequency of accidents does not simplify the life of insurers. It actually makes their tasks more complex. Aviation insurance claims remain extremely expensive, with close to $2 billion worth of claims for airlines, airplanes, engines, and part manufacturers, airports, and general aviation operators on the last 12 months. But insurers have less and less past claims data available to assess the risk of their clients. That is why they need to invest more and more to capture large amounts of complex information, to identify risk trends before accidents happen. Computerised algorithms are developed to monitor millions of flights and measure their associated risks. Accidents do not only happen to others. This is why insurance is everywhere in the aviation world. Not a single aircraft could be manufactured, sold, or operated without a complex chain of insurances.
While aviation remains the safest form of transport, new aircraft materials and increasingly complex legal environments on the back end, aviation players are pouring resources into maintaining and securing their complex cyberinfrastructure. These aviation players can include airplane manufacturers, sub-contractors, airports, refuelers, airlines, startup smart aviation providers, and commercial and private operators. One person boarding a plane touches numerous digital touchpoints—buying a ticket and checking in on a website, the airline automating flight data, the ground crew communicating, and the pilots leveraging satellite-based GPS navigation systems. However, technology infrastructure is only as strong as its weakest link. A cyberattack—or even something less malicious such as software bugs or accidental data loss—on any part of the aviation system could have catastrophic consequences and generate a massive ripple effect that would immediately impact global travel and commerce. As thousands of airplanes plough the skies, especially in the UAE—Dubai International Airport was recently ranked as the world’s busiest international airport—a wide range of aviation players need to have the right level of insurance to protect employee and customer safety and secure the company’s and even the world’s finances. How is the oil and gas industry reacting to digital technology and what part does insurance play for this sector? The digital revolution is heavily upon us. For all companies in the oil and gas industry, digital transformation could mean the difference between success or failure. Substantial gains have been made on the price per oil barrel or its equivalent since the 2014 downturn, however the industry is still in its early stages of recovery.
If energy demand fails to rise further, then the sector needs to find new ways to reinvent itself, such as becoming a low-cost provider of energy commodities, or providing the actual equipment and services needed to produce and bring commodities to the market place. The development of increasingly affordable digital technology is already unleashing innovations across the oil and gas value chain, affecting everything from how companies develop fields and procure goods and services, to the way that back-office services are providing the most optimal and effective support. Such innovations could change everything, resulting in radical efficiency gains and improvements to both top and bottom lines. Companies willing to innovate and invest can unlock tremendous value, and remain financially strong, regardless of global oil supply and demand trends. As the era of the digital oilfield comes to life, energy players face increasing risks of technology failure—whether from cyberattacks, insider attacks, faulty equipment or outdated technology. Oil and gas companies and the energy sector need to be aware of the huge values at stake and protect themselves as best as possible. The insurance industry is working alongside the oil and gas sector to understand these huge exposures, and to help provide policies of cover that have evolved to meet the enhanced risk factors out there. We’ve talked a lot about the insurance needs for the space, aviation and energy sectors. What about the insurance companies themselves—how do they need to digitally transform? Digital transformation is a key goal of insurance CEOs, with a recent EY report projecting that global insurance technology spend will grow at double the rate compared to the sector’s real growth rate. Insurance companies face a wide
NOW, SATELLITE PLAYERS ARE INCREASINGLY CONCERNED ABOUT THE RISKS FROM CYBERTHREATS. THIS FEAR HAS MOVED FROM THE REALM OF ‘IF’ TO ‘WHEN’ AN ATTACK WILL HAPPEN—NOT JUST AGAINST THE SPACECRAFT THEMSELVES, BUT ALSO AGAINST THE GROUND STATIONS AND THEIR SYSTEMS. Laurent Lemaire, Chairman and CEO, Elseco
range of challenges—especially with respect to more efficient underwriting and lower running costs. Insurance companies also need to invest not only in their own digital transformation, but also finding, training, and retaining the right staff—with engineers, statisticians, and data scientists complementing the traditional lawyers and insurance brokers. Ideally, one digital platform can transform insurance underwriting— combining e-commerce where agents, customers, and insurers can collaborate; automated end-to-end claim processing and billing; and real-time data analytics and predictive analytics. Elseco nextgeneration technology platform, called ATOM, can help insurance companies solve these challenges and develop innovations that will support their digital business needs. We’re seeing strong interest in the ATOM platform, which runs on the digital core of the SAP HANA in-memory platform. Using ATOM, we’ll be able to allow insurance companies to offer a wider range of insurance solutions, and track and predict the performance in real-time. In the coming months, we’ll combine even more solutions across the business suite, e-commerce, and predictive analytics to further reduce supply chain costs. As the insurance industry continues to evolve worldwide, I strongly believe that only the insurance companies that have a digital core and operate in real-time will be able to meet customer demands and adapt their offerings effectively.
Elseco underwrites on behalf of 74 insurance companies based all over the world; for the 2017 underwriting year Elseco wrote on behalf of its members $120 million of net premiums across space, aviation and energy.
ITS TIME TO TAKE THE FUTURE SERIOUSLY We currently live in an era where photovoltaic investments is as lucrative as its other energy siblings. Martin Haupts, CEO of Phanes Group, explains why
n investment in solar is a palpable one. Global agendas seldom align in the way the renewable sector has caused them to in recent years: sustainable energy and reducing our carbon footprint are topics that are discussed by politicians and environmentalists alike. This will only have a positive effect on economies and societies across the world. Rising populations, remote communities, and fast-growing economies will all benefit from increased solar investment in the next decade. Even in spite of the United Statesâ€™
potential renewable energies policy turn, the country doubled its solar capacity in 2016, growing nationwide solar jobs to 260,000. Its sudden change of course in 2017 fueled the conversation further among other willing nations. In the Arab world, for example, the outlook is considerably brightâ€” Middle Eastern nations are embarking on an ambitious journey to develop a sustainable, clean energy supply system. In an oil-dominated region, the turning of the tide from finite fossil fuels to clean energy is encouraging for governments, investors, and the public.
With an estimated 692 million MENA residents by 2050, the strain on national resources will become increasingly evident. Middle Eastern nations have understood the need for diversified economies, and diversified, sustainable energy supplies. Another market that is in dire need of increased investment is one that offers all of the benefits to participating parties. Sub Saharan Africa has a surging energy demand. Currently, there are 600 million citizens without access to power. Of those that do, many suffer from power outages and steep prices. Fortunately, addressing this issue is high on international agendas.
With an estimated
MENA residents by 2050 the strain on national resources will become evident PHOTO CREDIT: Shutterstock/WADIOSTOCK
Conversation is growing year-on-year, whether it’s at global renewable events, in trade publications, or in African government boardrooms. The African continent is contributing significantly to the conversation, and it could not be at a better time. We are operating in an era where the benefits of photovoltaic (PV) investment outweigh the risks and challenges, even in Africa. This is thanks to those that have a profound understanding of the local market, political environment, and the structuring of assets and solar plants to the highest international standards.
The range and appetite of institutional and private investors to dedicate their funds to PV in today’s markets further demonstrates this. Green banks, sovereign wealth funds, pension funds, and others are turning towards PV solar for mid- and long-term investments. The potential of PV solar as an asset class is especially attractive for investors who are looking for long-term, stable returns. Innovative funding patterns such as crowd funding platforms are gathering momentum in the renewable sector. Compared to other renewable resources, like, wind, PV is
much less volatile—even in less sunabundant regions. Hence, the potential of investment into PV in Sub Saharan Africa, one of the regions with the highest irradiation, is undisputable. SOLAR OUTPERFORMING ITS ENERGY SIBLINGS Solar projects continue to become more investible with each passing year, in parallel to better advancements in technology. According to a report published by EY, the annual rate of return on investment in the renewable sector is between 6.6 and 10.1 per cent. In Africa, these figures are still
comfortably above 10 per cent, reaching the mid-teens. In fact, in the last four years, renewables, and particularly solar, have significantly outperformed other traditional energy stocks. These figures have taken solar into the mainstream, with more than $750 billion worth of investment resulting in 200GW of solar energy production in the last few years alone. Another core reason for this interest is the adaptability, variability and scalability of the asset class. Experienced solar developers can create bankable solar projects in almost any environment, including those that are detached from national grids or in remote rural areas. Currently, PV solar represents less than one per cent of investors’ assets. But EY predicts solar will account for more than 30 per cent of all generating capacity by 2040—a stat not achievable without a positive upward trend in PV investment around the world. From a political and policy perspective, the renewable energy market continues to shine as a serious alternative to other fuels. The highest calibre example is probably BP, which just purchased a 43 per cent, $200 million stake in Lighthouse. Not only is Lighthouse Europe’s largest solar developer, showing how seriously BP considers the sector, but it also marks a dramatic solar U-turn from the petroleum company that withdrew from solar just six years ago. Also, Total’s recent acquisition of a major stake in the French IPP Eren underscores this trend. So why are these types of companies emptying their pockets for a slice of the solar cake? One of the factors is of course the benefits it provides for economic growth, domestic industry growth, and growth in socially challenged communities in new markets around the world, especially Sub Saharan Africa. The region has a worrying undersupply of energy infrastructure, which is becoming an increasing obstacle for socio-economic growth. The African Union forecasts a collective growth figure
IN AN OIL-DOMINATED REGION, THE TURNING OF THE TIDE FROM FINITE FOSSIL FUELS TO CLEAN ENERGY IS ENCOURAGING FOR GOVERNMENTS, INVESTORS, AND THE PUBLIC. Martin Haupts, CEO of Phanes Group
that would see GDP multiple six times between 2010 and 2040, according to an article published by Reuters. For that to become achievable, it would need to increase its terawatt hours from 590 to more than 3,100 across that time. This is where an attractive investment opportunity lies. Appropriate risk mitigation is a crucial factor in any investment decision—the same applies for investment into PV solar in new markets. Although the need for energy on the continent is obvious, investments are still often considered a bold move. The key to this is the bankability of each PV project. Fortunately, today, Power Purchase Agreements (PPAs) are more defined, and the regulations between government authorities,
developers, and investors are much stronger if the countries’ governments are implementing frameworks according to international standards. This is lowering the risk factor for investors, which is resulting in significantly better project options for markets like Sub Saharan Africa. Surprisingly, since access to affordable energy is one of the key factors for economic growth, the default rates in Africa are impressively low—contrary to common belief. Unfortunately, in spite all this obvious opportunity and progress in the region, the infrastructure is still not being leveraged—even though the solar capacity for Africa is estimated at 1100 gigawatts. This gap is something we recognised some years ago, when we started focusing on the Sub Saharan African region. It is also crucial for the private sector to come in and help in closing the energy gap since many citizens live in remote areas with no access to the national grid. With a technology like PV solar we are not only providing energy for the grid but also helping to build up necessary infrastructure that can run independently. This very outlook stands as a blueprint for how we built our team, with a strong specialised background in structured finance, as well as industry experts across not just development and execution, but also legal matters, which allows us to thoroughly assess the most attractive, stable investment opportunities within a short turnaround time. What we will continue doing is electrifying (not only) the African continent while shining a bright light on the diverse investment opportunities that exist. These are needed not only for a change from fossil to renewable sources of energy, but also to help underdeveloped economies. The PV solar industry itself opens up a new and exciting industry to global and local investors looking to add new pages to their investment portfolio.
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MAINTAINING BALANCE Where can asset allocators find ballast when both volatility and correlations are rising? Erik Knutzen, Chief Investment Officerâ€” Multi-Asset Class, at Neuberger Berman, shows the way
olatility is back. One of our key themes at the start of this year was moving from an unusually subdued volatility environment to something more normal for this stage in the cycle. Through 2017, the S&P 500 Index moved by one per cent or more only 10 times. Since the start of February, it has done so 17 times. The volatility in early February was triggered by unexpectedly high US hourly earnings growth. We had another jolt last week, and this time you could pick your catalyst. Flash Purchasing Managers Index reports were softer than expected. Technology stocks were under attack because of concerns about data security. President Trump upped the ante on trade on Thursday with his tariff plans for Chinese imports. The day before, markets were unsure what to make of a less-hawkish-than-expected debut by Fed Chairman Jerome Powell.
Whichever catalyst you pick, the more important point to recognise is really the same as the one in February: volatility has returned to markets, so what can investors do to buffer their portfolios from it? Usually, the answer involves balancing equity risks with a good dose of interest rate risk from core government bonds on the assumption that these two risks are negatively correlated. Our new environment may be characterised not only by higher interest rates, higher inflation and higher volatility, however, but also by higher correlations between equities and bonds. CORRELATIONS ARE CYCLICAL Since the financial crisis, investors have benefitted from low to negative correlations between the two largest asset classes. They have enjoyed the free lunch of being able to diversify the downside risk in their equity portfolios with developed market government bonds.
CORRELATIONS TEND TO BE NEGATIVE DURING PERIODS OF LOW GROWTH AND LOW INFLATION, AND POSITIVE DURING PERIODS OF HIGHER ECONOMIC GROWTH AND INFLATION. PHOTO CREDIT: Shutterstock/Gopixa
Over the longer term, however, stockbond correlations have been modestly positive, with cyclical characteristics. Correlations tend to be negative during periods of low growth and low inflation, and positive during periods of higher economic growth and inflation. That positive correlation has tended to hit its highest levels toward the end of the business cycle, when central banks attempt to cool down the economy by tightening monetary policy. If our view is correct, and we are entering a period of somewhat faster rising prices and tighter policy, history suggests that asset allocators may not stand to benefit as much from the lowcorrelation free lunch. An early taste of this came during February, when the S&P 500 Index fell by 3.7 per cent and the Bloomberg Barclays US Aggregate Long Treasury Index was down by three per cent. In our new environment, government bonds may no longer provide a strong buffer during a bout of volatility. AS CORRELATIONS RISE, DIVERSIFICATION BECOMES A CHALLENGE We now need a more thoughtful approach to managing risk and achieving portfolio diversification. There are various ways to go about this, but we see three straightforward approaches. The simplest is to reduce overall risk levels across portfolios. A keynote of our recent thinking has been the readiness to adopt less volatile and less market-sensitive positions in traditional asset classes. That might involve moving into higher-quality companies in equities and credit, or exchanging some straight equity exposure for the lower-volatility alternative of put option writing. The second approach is to seek out other markets that diversify away from equities but do not carry the same risks as bonds. In the later stages of the business cycle, inflation-sensitive
Erik Knutzen, Chief Investment Officerâ€”Multi-Asset Class, at Neuberger Berman
assets such as TIPS, global inflationlinked bonds and commodities have tended to perform well. Floating-rate investments such as loans may also provide a shelter. The third approach is to seek out investments that are not correlated to traditional market risks at all. Examples might include uncorrelated, lowvolatility hedged strategies or strategies that seek to harvest multi-asset class risk premia. A sensible course might be to blend some aspects of all three approaches. When government bonds are no longer an effective anchor to windward, investors are challenged to find ballast for their portfolios to keep them upright without weighing them down.
Erik Knutzen, CFA, CAIA and Managing Director, is Co-Head of the Neuberger Berman Quantitative and Multi-Asset Class investment team and Multi-Asset Class Chief Investment Officer. Erik joined in 2014 and is responsible for leading the management of multi-asset portfolios, driving the asset allocation process on a firm-wide level, as well as engaging with clients on strategic partnerships and multi-asset class and quantitative solutions.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualised, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investorâ€™s individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole.
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PROS AND CONS Kenneth Morgan, Head of Business Development and Marketing ay BVI Finance looks at the business and banking benefits of setting up offshore
ore Middle East businesses are choosing to locate themselves offshore for a number of reasons, including the ability to quickly and efficiently set up a business, manage the assets within said businesses, and settle any disputes that may come from various parties. An added benefit is that offshore structures work well alongside Shari’ah financial law thanks to the flexibility, fairness, and treatment of money they offer Islamic finance practitioners.
In fact, there are now more than 12,000 business companies registered in the British Virgin Islands (BVI) alone that are based in the Middle East and North Africa (MENA) region. FLEXIBILITY Offshore centres are some of the largest jurisdictions in the world for incorporations, making them some of the most flexible business options. This is partly because offshore incorporations are cost effective and fit with the growing trend of Middle East
businesses seeking out cost-cutting alternatives when it comes to banking— offshore government incorporation fees and annual renewal fees are significantly lower than doing so onshore in the Middle East. This is particularly true if owners of the business are expatriates, as it allows them to avoid costly licencing and sponsor fees. However, offshore companies operating in the Middle East must still be compliant with local laws and regulations. Incorporating offshore also allows for different types of incorporations.
There are more than
MENA-based companies registered in the British Virgin Islands
PHOTO CREDIT: Shutterstock/Andrea Haase
A Middle East firm based offshore can be a limited or unlimited company, a restricted purpose company, or can be a company consisting of segregated portfolios. This is important given both Islamic and conventional funds share common objectives, such as pooling investors, preserving capital, and optimising returns, but Islamic funds adopt certain conventions in order to adhere to the requirements of Shariâ€™ah law. The flexibility required for this is inherently built into the structure of offshore financial vehicles.
SO LONG AS THERE ARE DIFFERENT TAX RATES IN DIFFERENT COUNTRIES, OFFSHORE FINANCIAL CENTRES WILL SERVE AS NEUTRAL CONDUITS FOR THE FLOW OF MONEY. Kenneth Morgan
Some jurisdictions in the Middle East have restrictions, such as who can own shares, the number and classes of shares that can be issued and the type of activities that can be carried out. As a result, offshore centres are often vital for cross-border transactions involving Middle East groups with offshore vehicles used as joint venture channels. Incorporating businesses and assets offshore also offers organisations the ability to pool financial resources. There are often significant opportunities for investing in the infrastructure of
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The private equity and venture capital landscape is largely dependent on diversification agendas and international events across the region
GREEN DEVELOPMENTS IN ISLAMIC FINANCE
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developing countries, for example there has been a growing appetite for Islamic finance emerging across various African nations. But, in these nations, business law is still in its infancy and the judicial system can be lacking when dealing with complicated corporate matters. Creating an offshore corporation to manage finances across borders between the Middle East and other, less experienced regions offers access to a neutral jurisdiction, an up-to-date statutory and regulatory framework and sophisticated courts. EFFICIENCY AND TRANSPARENCY Many offshore jurisdictions base their legal systems on English common law, making them trusted destinations for businesses worldwide. These protections and benefits afforded to companies registered in these jurisdictions create an attractive environment for those operating on an international level. According to the World Bank, it takes on average 437 days to enforce a contract in the UK or one of its overseas territories, while it takes 638 days in the MENA region. The World Bank estimates that businesses can recover more than 85 cents on the dollar from insolvencies in the UK and its overseas territories, whilst debtors only receive around 25 cents on average in the MENA region. Shari’ah financial philosophy is based upon the fundamental principles of openness, transparency, the promotion of fairness and the treatment of money not as an asset to be accumulated. Many offshore financial centres have been shown to be more compliant in terms of transparency and sharing of information than many onshore jurisdictions. The likes of the BVI, Cayman Islands and Bermuda are more compliant than almost all OECD countries with regards to meeting the requirements of the Financial Action Task Force. However, it is important to acknowledge the difference between legitimate tax
THE WORLD BANK ESTIMATES THAT BUSINESSES CAN RECOVER MORE THAN 85 CENTS ON THE DOLLAR FROM INSOLVENCIES IN THE UK AND ITS OVERSEAS TERRITORIES, WHILST DEBTORS ONLY RECEIVE AROUND 25 CENTS ON AVERAGE IN THE MENA REGION. Kenneth Morgan, Head of Business Development and Marketing, BVI Finance
planning and illegal activities such as evading tax and hiding profits. So long as there are different tax rates in different countries, offshore financial centres will serve as neutral conduits for the flow of money. Indeed, international trade is facilitated by tax-neutral entities which serve to aggregate assets and capital. For individuals and families in the Middle East looking to move and manage assets offshore there are clear business benefits. Shari’ah scholars often require parties to a transaction to deal at arm’s length, and trust structures can be useful in this instance. Cayman STAR trusts or BVI VISTA trusts are commonly used here as they afford sufficient flexibility for such transactions.
These structures remove the duty of trustees to monitor and intervene in the management of a company held in trust and therefore allow the client to retain effective control of the company having divested himself of its ownership. This allows effective succession planning without having to cede control of the assets, which is particularly useful for the management of heirlooms and longestablished family businesses. Private Trust Companies are also available to further enhance family control of succession issues. These allow senior family members to be more involved in the management of family trusts than they would be using a traditional professional corporate trustee. THE KEY TO MIDDLE EASTERN ENTREPRENEURSHIP In all, using the facilities of offshore jurisdictions can offer Middle East based business owners and operators myriad of cost-saving and financial benefits. More Middle East start-ups in particular are choosing to base their new businesses on offshore jurisdictions to reap the benefits of how business can be formed, managed and financed. Careem Inc., the Dubai-based ride-sharing platform, is a prime example of start-up entrepreneurs successfully securing investment via a British Virgin Islands incorporated investment vehicle. Established in 2012 as a website-based service for corporate car bookings, the business was recently valued at $1 billion and is widely recognised as the “Uber of the Arab world”. The inherent set up of many offshore financial vehicles lends them to Shari’ah laws, as well as streamlining the incorporation process and removing often cumbersome regulatory burdens for business owners. As entrepreneurship in the Middle East continues to thrive in coming years, offshore financial centres will prove instrumental in supporting this growth and enabling even more businesses to succeed on an international level.
ADVERTORIAL Advertorial Advertorial
Working Workingwith with Middle MiddleEast East investors investors and andtheir their
With With a strong a strong and and growing growing presence presence in the in the region, region, Jersey Jersey is increasingly is increasingly providing providing a range a range of of private private wealth wealth management management services services to GCC to GCC clients, clients, as as Geoff Geoff Cook, Cook, CEO CEO of of Jersey Jersey Finance, Finance, explains: explains:
global global ambitions ambitions For For several several decades decades Jersey Jersey firms firms have have been been building building links links withwith markets markets across across the the GCC, GCC, so that so that today today Jersey Jersey provides provides a vital a vital rolerole in supporting in supporting family family succession succession planning planning andand facilitating facilitating global global investment investment strategies strategies on behalf on behalf of investors of investors in the in the region. region.
In particular, In particular, a survey a survey for that for that paper paper revealed revealed thatthat more more thanthan halfhalf (55%) (55%) of professionals of professionals working working withwith family family businesses businesses in the in the GCCGCC sawsaw succession succession planning planning as the as the most most critical critical issue issue for GCC for GCC families families today. today.
These These positive positive links links have have been been developed developed thanks thanks to the to the combined, combined, forward forward thinking, thinking, efforts efforts of Jersey’s of Jersey’s regulator, regulator, government government andand finance finance industry, industry, all of allwhom of whom have have visited visited the the region region for a for number a number of years. of years. For For its part, its part, Jersey Jersey Finance Finance established established an operation an operation in the in the UAEUAE more more thanthan six years six years agoago to work to work together, together, more more closely, closely, withwith key key stakeholders stakeholders on on the the ground. ground.
However, However, whilst whilst HNWIs HNWIs in the in the GCCGCC clearly clearly acknowledge acknowledge the the importance importance of succession of succession planning planning - which - which cancan be extremely be extremely complex complex given given the the global global nature nature of families of families andand their their businesses businesses - there - there is still is still a reluctance a reluctance to engage to engage withwith third-party third-party support support andand a tendency a tendency to default to default to deferring to deferring succession succession decisions decisions – – something something thatthat could could prove prove costly costly in the in the long-run. long-run.
What What hashas become become clear clear is that, is that, against against a backdrop a backdrop of shifting of shifting markets markets andand a changing a changing global global political political landscape, landscape, investors investors in the in the GCCGCC continue continue to find to find genuine genuine appeal appeal in the in the expertise, expertise, substance substance andand stability stability Jersey Jersey cancan offer offer as an as international an international finance finance centre centre (IFC), (IFC), as well as well as its as range its range of tried-and-tested of tried-and-tested wealth wealth products products – not – not least least its world-renowned its world-renowned trust, trust, foundation foundation andand company company vehicles vehicles andand Shari’ah-compliant Shari’ah-compliant services. services. TheThe indications indications are are thatthat investors investors in the in the GCCGCC are are increasingly increasingly likely likely to need to need thisthis sortsort of specialist of specialist cross-border cross-border support support in the in the future future too.too. According According to the to the Boston Boston Consulting Consulting Group, Group, private private wealth wealth in the in the GCCGCC is set is set to reach to reach $12$12 trillion trillion by 2021, by 2021, growing growing at aat rate a rate of 8.1% of 8.1% - compared - compared to the to the global global average average of 6% of (‘Global 6% (‘Global Wealth Wealth 2017: 2017: Transforming Transforming the the Client Client Experience’). Experience’).
According According to the to the research, research, for example, for example, there there are are realreal misconceptions misconceptions around around the the issues issues andand solutions solutions available available when when it comes it comes to wealth to wealth structuring. structuring. Over Over halfhalf (56%) (56%) of of GCC-based GCC-based advisers advisers saidsaid thatthat lossloss of control of control is the is the biggest biggest misconception misconception thatthat GCCGCC families families have have when when it comes it comes to wealth to wealth structuring, structuring, whilst whilst 23%23% are are concerned concerned by the by the lacklack of transparency of transparency of structures. of structures. Although Although thisthis offers offers some some considerable considerable challenges challenges for wealth for wealth professionals professionals in the in the region, region, it also it also highlights highlights justjust howhow important important it isitfor is professionals for professionals withwith first-class first-class experience experience in forwardin forwardthinking thinking IFCsIFCs likelike Jersey, Jersey, whowho are are used used to managing to managing complex complex cross-border cross-border financial financial flows, flows, to work to work withwith families families andand investors investors to bring to bring clarity, clarity, build build understanding understanding andand instil instil confidence. confidence.
Jersey Jersey is ready is ready to support to support thisthis trend, trend, offering offering GCCGCC investors investors a a safe, safe, neutral neutral andand attractive attractive platform platform andand enabling enabling them them to create to create a certain a certain future future by carrying by carrying out out their their increasingly increasingly sophisticated sophisticated wealth wealth planning planning andand investment investment strategies. strategies.
Jersey Jersey is already is already focused focused on providing on providing thisthis critical critical support support by by working working withwith advisers advisers andand investors investors in the in the region. region. Consequently, Consequently, firms firms in Jersey in Jersey are are seeing seeing an uptick an uptick in the in the number number of private of private wealth wealth vehicles vehicles being being re-domiciled re-domiciled to Jersey to Jersey from from lessless advanced advanced jurisdictions, jurisdictions, as investors as investors seek seek a high-quality a high-quality trusted trusted solution. solution.
Fundamental Fundamental Challenges Challenges
Flight Flight to Quality to Quality
TheThe need need for this for this kindkind of specialist of specialist support support waswas evidenced evidenced onlyonly lastlast yearyear in ain white a white paper, paper, published published by Jersey by Jersey Finance Finance in in conjunction conjunction withwith Hubbis, Hubbis, which which identified identified some some fundamental fundamental challenges challenges HNW HNW individuals individuals in the in the GCCGCC will will faceface in the in the coming coming decades. decades.
Whilst Whilst Jersey Jersey hashas earned earned a reputation a reputation for specialist for specialist private private wealth wealth work work in markets in markets across across the the GCC, GCC, thisthis hashas expanded expanded in recent in recent years years so that so that today today there there are are in excess in excess of 40 of Jersey 40 Jersey firms firms active active in in the the region region whowho are are undertaking undertaking a broad a broad range range of investment of investment andand corporate corporate as well as well as private as private wealth wealth work. work.
UNITED UNITED ARAB ARAB EMIRATES EMIRATES
KINGDOM KINGDOM OF OF SAUDI ARABIA SAUDI ARABIA
For For instance, Jersey is highly regarded for outbound commercial instance, Jersey is highly regarded for outbound commercial realreal estate investment, an increasingly attractive asset class for for estate investment, an increasingly attractive asset class GCCGCC investors, thanks to its andand flexible structures for for investors, thanks to stability its stability flexible structures pooling capital andand acquiring andand selling such assets, focusing pooling capital acquiring selling such assets, focusing on the UK as as Europe andand the the US. US. on the UKwell as well as Europe Additionally, GCCGCC institutional investors, led led by sovereign wealth Additionally, institutional investors, by sovereign wealth funds (SWF), are are looking more andand more at opportunities in in funds (SWF), looking more more at opportunities markets such as the UK,UK, US and Europe andand as aas result, Jersey markets such as the US and Europe a result, Jersey fund practitioners are are seeing rising levels of capital from fund practitioners seeing rising levels of capital from institutional investors - the- the world’s largest private equity fund, institutional investors world’s largest private equity fund, structured through Jersey, hashas a GCC SWFSWF as aas primary investor. structured through Jersey, a GCC a primary investor. Jersey’s proposition andand expertise in alternative fund servicing, Jersey’s proposition expertise in alternative fund servicing, together withwith its ongoing seamless access to European markets together its ongoing seamless access to European markets andand strong tiesties to the UK,UK, lends itself wellwell to this trend, withwith strong to the lends itself to this trend, direct investment, co-investment, private equity andand clubclub direct investment, co-investment, private equity investment deals all amongst the the favoured investment strategies investment deals all amongst favoured investment strategies for GCC investors. Indeed, the the jurisdiction hashas seen a number of of for GCC investors. Indeed, jurisdiction seen a number major private equity andand realreal estate fund launches involving GCCGCC major private equity estate fund launches involving investors overover the the pastpast twelve months. investors twelve months. Evolving Relationship Evolving Relationship
Jersey: Jersey: 1010 key key strengths strengths 50 years’ experience experience in private in private wealth wealth management management + 50+ years’ tiesties to the to the GCC, GCC, withwith expertise expertise in Islamic in Islamic + Deep + Deep finance finance
adopter adopter to the to the latest latest transparency transparency standards standards + Early + Early recommendations recommendations from from the the OECD, OECD, World World + Glowing + Glowing Bank, Bank, IMFIMF andand MONEYVAL MONEYVAL
A substantial network network of top-level of top-level financial financial services services + A+substantial professionals professionals
An enviable community community of support of support services, services, from from + An+ enviable legal legal to accounting to accounting
Jersey’s relationship withwith the the GCCGCC is evolving as Jersey seeks to to Jersey’s relationship is evolving as Jersey seeks provide a robust andand attractive platform for investors to pursue provide a robust attractive platform for investors to pursue their family wealth andand outbound investment strategies. their family wealth outbound investment strategies. Whilst there is undoubtedly appetite amongst families to tackle Whilst there is undoubtedly appetite amongst families to tackle succession planning to future-proof their complex family wealth succession planning to future-proof their complex family wealth andand assets, it’s it’s clear thatthat investors are are alsoalso increasingly turning assets, clear investors increasingly turning to expert advisers for specialist support to put their capital to to to expert advisers for specialist support to put their capital work in increasingly diverse markets andand sectors. work in increasingly diverse markets sectors.
products products – from – from trusts trusts to foundations, to foundations, + Innovative + Innovative private private trust trust companies companies andand family family offices offices
location location + Stable + Stable tiesties to London to London + Close + Close perfect perfect blend blend of the of the transparent transparent andand the the + The + The confidential confidential
Jersey offers welcome experience to meet thisthis need, guiding Jersey offers welcome experience to meet need, guiding investors through the the complexities of their ambitions, andand investors through complexities of their ambitions, working withwith them to realise a positive future. working them to realise a positive future.
linkedin.com/company linkedin.com/company /jersey-finance /jersey-finance
LIMITLESS POTENTIAL AI is the key to the future of banks and to banks of the future, says Amr El Saadani, Accentureâ€™s Managing Director and Financial Services Lead in the Middle East & Turkey
Amr El Saadani
n the past few years, artificial intelligence (AI) has come of age and has helped increase human efficiency in ways never thought possible. The strength of this innovation lies in the fact that it allows computers to process and analyse large volumes of incredibly complex data at a fraction of the time it would take humans doing the same task, finding patterns and connections in a way no single person would be able to, acting based on that data or suggesting a course of action for their human enabler. Most importantly perhaps, is that these machines continue learning and improving as they go, which means that their potential is limitless. While many fear that digital disruption will have negative effects on businesses, the benefits are far greater. From enhancing productivity
to lowering costs of doing business, AI can enable positive, real-world outcomes. These benefits have pushed companies in the financial sector and other industries to adopt this innovation in one way or another. While banks have been using AI for many years to perfect and speed up different processes, they are only now starting to implement it in client-facing interactions, with banking executives in the region and around the world having realised the importance of the technology. A recent Accenture report, which surveyed 589 bank executives in 30 countries including the UAE and Saudi Arabia, found that 85 per cent of GCC bank respondents agreed that AI will revolutionise the way they gain information from and interact with customers.
of GCC bank respondents in an Accenture survey agreed that AI will revolutionise the way they gain information from and interact with customers
PHOTO CREDIT: Shutterstock/whiteMocca
Some banks have already started making major strides in this area by developing AI-enabled tools. For example, Capital One Bank developed a process that allows people to cheque their accounts and pay credit card bills via Amazon Echo’s Alexa. HSBC’s customers can connect with the bank’s virtual assistant, Olivia, to inquire about their credit cards or current account balance. What makes AI so appealing is that it can create efficiencies within contact centres, simplify dispute and fraud management and accelerate enquiry resolutions while offering customer insights and supporting account management. And perhaps most important of all, AI can help banks create hyperpersonalised services that have become a necessity in an age where customers have ever rising expectations because of the level of attention and efficiency they get from their technology providers. WHAT’S NEXT FOR BANKS? With banks charting a new course and seeking to reshape their business models to compete in the digital world, some have assumed that technological prowess will become their main competitive advantage.
WHAT MAKES AI SO APPEALING IS THAT IT CAN CREATE EFFICIENCIES WITHIN CONTACT CENTRES, SIMPLIFY DISPUTE AND FRAUD MANAGEMENT AND ACCELERATE ENQUIRY RESOLUTIONS WHILE OFFERING CUSTOMER INSIGHTS AND SUPPORTING ACCOUNT MANAGEMENT. Amr El Saadani
However, we believe that it is a combination of people and technology that will truly create competitive advantage in the banking industry of the future. We do not foresee the popular science fiction plot where humans must battle machines. Instead, all industries stand to benefit tremendously from creating a symbiotic relationship where humans are augmented by machines. To create successful personalised services to meet customers’ needs, banks need to combine well-trained and motivated
staff with scalable data-driven processes. With AI capable of replacing many repetitive tasks, it may seem that it could have some impact on staffing levels. However, the reality is that it will bring completely new opportunities to the workforce. Employees will be able to take on more rewarding and higher-value roles while providing more personal services with a human touch to their customers. In today’s fast-paced world, perhaps one of the biggest challenges for banks is that they will have to dive head-first into uncharted territory. Our research has shown that there is a disconnect between how banks see their offerings and how customers see them. Therefore, financial firms need to critically review their offerings to ensure that they are meeting their customers’ changing expectations. The banks that will gain the most from AI will be those that are prepared to completely redefine how they work, how they create innovative products and services, and how they transform customer experiences. They must do this while keeping in mind their goal: becoming a trusted advisor to their customers and empowering their staff.
WHEN CYBERCRIMINALS TAKE ON FINANCIAL INSTITUTIONS Amir Kanaan, Managing Director for the Middle East, Turkey and Africa at Kaspersky, discusses the development of cyberthreats in 2018, and what to expect 74
PHOTO CREDIT: Shutterstock/Legarto Film
he year 2017 witnessed great changes in the world of cyberthreats facing financial organisations. We witnessed a continuation of cyberattacks targeting systems running SWIFTâ€”a fundamental part of the worldâ€™s financial ecosystem. Attackers were able to use malware in financial institutions to manipulate applications responsible for cross-border transactions, making it possible to withdraw money from any financial organisation in the world, because SWIFT software is unified and used by almost all the major players in the financial market. Victims of these attacks included several banks in more than 10 countries around the world. We also saw the range of financial organisations that cybercriminals have been trying to penetrate expand significantly. Different cybercriminal groups penetrated bank infrastructure, e-money systems, cryptocurrency exchanges and capital management funds; their main goal was to withdraw very large sums of money.
Attackers rely on proven schemes of monetising network access. In addition to their attacks on SWIFT systems, cybercriminals have been actively using ATM infections, including those on financial institution’s own networks, as well as wielding remote banking (RB) systems, PoS terminal networks, and making changes in banks’ databases to ‘play’ with card balances. Attacks on ATMs are worth mentioning separately. This kind of robbery became so popular that 2017 saw the first ATM malware-as-a-service: with cybercriminals providing on underground forums all necessary malicious programmes and video instructions to gain access to ATMs. Those who bought a subscription only needed to choose an ATM, open it following the instructions, and pay the service organisers for activating the malicious programme on the ATM, after which the money withdrawal process started. This type of scheme saw significantly increased numbers of cybercriminals, even making cybercrime accessible to non-professionals. We saw the interception of bank customers’ electronic operations through the hijacking of bank domains; customers did not have access to their bank’s real infrastructure, but to a fake one created by intruders. For several hours, criminals were able to perform phishing attacks, instal malicious code; and wield the operations of customers who were using online banking services at the time. There are a number of predictions for 2018: Attacks will occur via the underlying blockchain technologies of financial systems. Almost all the world’s large financial organisations are actively investing in systems based on blockchain technology. Any new technology has its advantages, but also several new risks. Financial systems based on blockchain do not exist autonomously, and any vulnerabilities and errors in blockchain implementation can enable attackers to earn money and disrupt the work of a financial institution.
A THREAT VECTOR THAT IS LIKELY TO BE ACTIVELY USED BY CYBERCRIMINALS IN THE COMING YEAR IS ATTACKS ON SOFTWARE VENDORS SUPPLYING FINANCIAL ORGANISATIONS.’ Amir Kanaan, Managing Director for the Middle East, Turkey and Africa, Kaspersky
For instance, in 2016-2017, a number of vulnerabilities and errors were discovered in smart contracts, on which a number of financial institution’s services have been built. More supply chain attacks will occur in the financial sphere. Large financial organisations invest considerable resources in cybersecurity, making penetrating their infrastructure no easy task. However, a threat vector that is likely to be actively used by cybercriminals in the coming year is attacks on software vendors supplying financial organisations. Such vendors, for the most part, have a weak level of protection compared to the financial organisations themselves. Social media account hacks and manipulation will be used to acquire financial profit through stock/crypto exchange trade. 2017 will be remembered as the year of ‘fake news’. Besides the manipulation of public opinion, this phrase can also mean a dishonest way of earning money. While stock exchange trading is mostly carried out by robots manipulating source data, which is used to make certain transactions, it can also lead to enormous changes in the price of goods, financial instruments and cryptocurrencies. In fact, just one tweet from an influencer, or a wave of messages on a social network created with the help of fake accounts, can drive the markets. And this method will certainly be used by intruders. With this approach, it’s almost impossible to find out which of the beneficiaries is the customer of the attack. ATM malware automation will become more prevalent. The first malware for ATMs appeared in 2009, and since then these devices have received constant attention from cyber-fraudsters. There has been a continuous evolution of this type of attack. Following the emergence of ATM malware-as-a-service, the next step will be the full automation of such attacks—a minicomputer will be connected automatically to an ATM, leading to malware installation and jackpotting or card data collection. This will significantly shorten the time needed for intruders to commit their crime.
More attacks are likely on cryptoexchange platforms. For the past year, cryptocurrencies have attracted a huge number of investors, which in turn has led to a boom in new services for trading various coins and tokens. Traditional players in the financial market, with highly developed cybersecurity protection, have not rushed to enter this field. This situation provides attackers with an ideal opportunity to target cryptocurrency exchanges. On one hand, new companies have not managed to test their security systems properly. On the other hand, the entire cryptocurrency exchange business, technically speaking, is built on wellknown principles and technologies. This means attackers know, and have access to, the necessary toolkit to penetrate the infrastructure of new sites and services working with cryptocurrencies. Traditional card fraud will spike due to the huge data breaches of the previous year. Big personal data leaks—including the Equifax case, which resulted in more than 140 million US residents’ data being leaked to cybercriminals, and the Uber case, which saw the data of another 57 million customers leaked—has created a situation where traditional banking security can seriously fail, because it’s based on the analysis of data about current or potential customers. For example, detailed knowledge of a victim’s personal data can allow attackers to pose as a banking customer, and extract their victim’s money or security information, while as far as the bank is concerned, their request looks legitimate. More nation-state sponsored attacks are likely against financial organisations. The infamous Lazarus group, which is likely to be North-Korean state-sponsored, has attacked a number of banks in different parts of the world in the last few years. These have included banks in countries in Latin America, Europe, Asia and Oceania, with purpose of withdrawing large sums of money, amounting to hundreds of millions of dollars. It is very likely that, next year
“IN 2016-2017, A NUMBER OF VULNERABILITIES AND ERRORS WERE DISCOVERED IN SMART CONTRACTS, ON WHICH A NUMBER OF FINANCIAL INSTITUTION’S SERVICES HAVE BEEN BUILT. Amir Kanaan, Managing Director for the Middle East, Turkey and Africa, Kaspersky
other APT groups from countries that have just joined the cyberspy game will follow this approach—both to earn money and to obtain information about customers, the flow of funds, and the internal procedures of financial organisations. Fintechs’ inclusion and mobile onlyusers could mean a fall in the number of traditional PC-oriented internetbanking Trojans, while novice mobile banking users will be a new prime target for criminals. Digital banks will continue revolutionising the financial sector on a global scale, especially in emerging markets. These banks are gaining more and more momentum and this, of course, has attracted cybercriminal attention.
We are sure that the world of cybercrime will see increasing attacks against these types of banks and their customers. Their main feature is the complete absence of branches and traditional customer service. All communication between the bank and its customers occur through a mobile application, which can have a couple of consequences. The first is a decrease in the number of Windows Trojans, aimed at stealing money through traditional internet banking. The second is that the growing number of digital financial institutions will lead to organic growth in the number of users that are easy targets for cybercriminals: people without any mobile banking experience, but with banking applications installed on their mobile devices. During recent years, the number and quality of attacks aimed at organisations in the financial sector has grown continuously. These are attacks are on the infrastructure of an organisation and its employees, not its customers. The financial institutions that have not already thought about cybersecurity will soon face the consequences of hacker attacks, and these consequences will be incompatible with the continuation of these businesses—they will lead to a complete halt in operations as well as extreme losses. To prevent these situations from happening, it is necessary to constantly adapt security systems to new emerging threats, but this is impossible without analysing data and information about the most important and relevant cyberattacks aimed at financial organisations. An effective approach to combating attacks will be for banks to choose the right security solutions, but also to use specialised intelligence reports on attacks as these contain information that must be implemented immediately into overall protection systems. For example, using YARA-rules and indicators of compromise (IOC), will become vital for financial organisations in the coming months.
THE FUTURE OF BAHRAINI BANKING Sael Al Waary, Chairman of AFS, sat down with Banker Middle East at the second Middle East & Africa Fintech Forum for a chat on Bahrain’s achievement in the fintech space
hat is Bahrain’s biggest milestone in fintech thus far? Two years ago the scenario was totally different in Bahrain. We launched fintech about a year ago and there were disruptions everywhere because people did not know how to accept fintech. I am very pleased that the MENA region caught up in the past 12 months—regulators creating sandboxes and frameworks as well as initiatives such as the fintech Bahrain Bay consortium. Banks cannot afford to sit around anymore and just keep watching—they
have to collaborate. In the future I see more collaboration between fintech and banks as we have no choice. Fintech companies alone will not make money. There has to be collaboration and economies of scale. It all boils down to customer experience now. As most people in fintech are not bankers, they fairly have a better view of what customers want. What is in the pipeline for AFS? We are a pioneer in payments. Thirty years ago, we started with traveller cheques and now we have moved into fintech. In the past two years we have heavily
invested in fintech. We will be launching a new company totally dedicated to fintech with a capital of $10 million just waiting for final clearance from regulators. This company aim to help banks with their digital journey. We will give the tools and apps to banks for SME solutions, analytics, new customer experience, and social media which they will only need to plug it into your structured system. This team is specially dedicated to provide fintech solutions rather to banks instead off each bank having to buy their own tools and their own apps. It will then be our job to worry about cybersecurity and
I PREDICT THAT THERE WILL BE A GLOBAL SANDBOX WHERE TECHNOLOGY COMPANIES IN BAHRAIN, CAN TAP INTO THE SANDBOX IN UK OR THE SANDBOX IN AUSTRALIA TO TEST THEIR SOLUTIONS GLOBALLY, BECAUSE EVERY SANDBOX HAVE DIFFERENT FRAMEWORKS. we have invested heavily in cybersecurity as we are in technology. We have to be certified every year by regulatory bodies, by security entities and US regulations, where otherwise we cannot be in the business. How do you see the business of banking in the region changing over the next five years? We are going to see target banking coming from challenger banks (which are probably start up banks) competing with the traditional banks. They require their own capital and their own systems, and they will be attacking three segments which are:
the unbanked, under served and unsatisfied customers, which is already happening now. Traditional banks on the other hand, will respond by leveraging technology and innovation. They will also leverage on the customer base and licences. Customers are becoming more sophisticated; bank transactions are all done either online on their mobile phone or iPads, and no longer going to bank branches. Today, Bahrain has a sandbox, and a lot of technology companies are already joining in to test their framework. I predict that there will be a global sandbox where technology companies
Sael Al Waary
in Bahrain, can tap into the sandbox in UK or the sandbox in Australia to test their solutions globally, because every sandbox have different frameworks. In the future the government will have to build bridges between the UK and Bahrain, and perhaps with New Zealand where these governments can collaborate. This will lower the cost as opposed to each country having their respective sandboxes. This does not necessarily apply solely to banking, however banking is currently where the money is. I do not see companies in trading, for example, ready to involve themselves in this process.
TOWARDS A SUSTAINABLE FUTURE
Mark Desario, Co-founder and CEO, Investbridge Capital and board member of Africa Crest Education talks about investment in education and Dubai Investment Corporationâ€™s first foray into East Africa
ell us about Africa Crest Education (ACE). Africa Crest Education it is a UAE-based company, registered as a holding company in the Dubai International Financial Centre. The reason it was established in the UAE is because there has been an enormous amount of effort made by the UAE Government to be cognisant of the trade relations and tax negotiations with various Africa markets and to make it very efficient to have inflow capital coming from the UAE into the various African markets. As such, we purposely built Africa Crest Education because the UAE, and in particular Dubai, is a fantastic gateway city to execute business across the entire pan-African marketplace. ACE is a growth platform for a 130years old Lebanon-based education company and platform, known as SABIS. SABIS was originally founded back in 1886 and has grown to be one of the largest private school operators in the world today, operating 58 schools and 70,000 students across five continents
The first school will open in Nairobi in September 2018.
everywhere, from mature markets such as the United States, Germany and the UK to many of the emerging markets and frontier markets here in the GCC, Pakistan, and most recently Panama in addition to the African market with two schools that are in Cairo, Egypt. What is Investbridge Capital’s role in ACE? Investbridge Capital (IBC) is built predominately to identify entrepreneurs or entrepreneurial companies that have experience, vision and execution ability. We then bring forward the structural and capital activities in order to help them
meet their goals. ACE was discovered through my Chairman’s relationships. We came to know the SABIS organisation and have made 20-30 trips to their corporate offices in Lebanon and many of their schools around the world to understand how they operate and whether they actually had a business model that was expandable. We fully concluded that they could execute an education investment in Africa, but the thing that stood in their way was efficient capital to acquire the land, build the schools and get their operating platform in place. What we did is put together a structure that was attractive to institutional investors.
What do institutional investors require? They want transparency, they want governance, they want to know how decisions are being made in the best interests of the investors that have given their capital to invest. They want to know that you have a proven track record, and can they take that track record into new and emerging markets. All these are things that IBC has put together to ensure SABIS’ success that they’ve had for the past 130 years continue on the African continent. The other major thing we did which we consider of paramount importance prior to any leaps to frontier, emerging or growth markets is to secure local
knowledge and local capabilities. One of the very first things that we did was found a phenomenal local partner in Centum Investments which is a publicly listed 50-year old company which trades on the Nairobi and Uganda stock exchange and with massive local experiences in the real estate market. [Centum Investments have] become a founder, sponsor, investor and development partner for these schools. By having that local expertise and having them sit on the board with us and having them guide us through the East Africa marketplace, that gives the confidence to investors that we will actually execute. So Investbridge is bringing primarily institutional investment to the ACE platform? Yes, so you saw most recently it was announced that the Dubai Investment Corporation has committed $20 million direct investment into ACE. This is their first foray into the East Africa market as an investment. The goal is to attract institutional monies that can look at the opportunity for where it’s heading to and not flipping the investment quickly, it’s really taking a patient investment process. Now because we do recognise that everybody has an interest in investing in education and everyone in our region particularly knows of the SABIS success story we built an investment vehicle, a special purpose vehicle, that we can actually sell, or allow for qualified investors to invest into, that is much smaller than normal because in order for an investor to invest in ACE the minimum investment amount is $10 million. That number is by far aimed at institutional investors and the likes of the Dubai Investment Corporation. We also recognise that there are family offices, ultra-high net worth individuals, and investors that are very interested in the story but may not have the ability or the confidence to commit a full $10 million, so we’ve created a special purpose vehicle that will allow for these
types of family offices and individuals to invest at a much smaller threshold but still get the same economic experience as if they had invested straight into ACE. It’s important to understand that ACE is a company, not a fund. This is a company that has its own CEO, its own CIO, its own professional management team. What does this investment look like? Is it bricks and mortar, such as schools? that is a really great question. I get that a lot, ‘am I investing in real estate, or am I investing in a school or am I investing in the operator?’ As you break down the pockets of the education sector there are many different pockets. Ours is a very simple process, in the first phase 85-90 cents of every dollar that is invested goes into the bricks and mortar. This is actually comforting for the investor because then they aren’t investing in, say, a philosophical technology or a soft cost overhead of human resources. It’s going into a physical asset of bricks and mortar which, by and large, by the time the investment has completed, and the school has been built, has achieved a multiple increase in value just by nature of its existence. So, the money gets deployed predominantly into the bricks and mortar—buying the land building the school, and then some very small amount for initial start-up capital. We have identified seven schools in our first pipeline and will spend about $125 million. More than 90 per cent of that is going towards bricks and mortar. What’s really extraordinary is that these schools become cashflow positive and self-sustaining almost immediately within a year and from there on you’re looking at all kinds of growth opportunities as your student population goes from startup to getting to a mature school—which we do not expect to happen for seven to eight years. We aren’t turning around and saying let’s build a school, open it up and it will have 2000 students; we believe it takes
WHAT WE DID IS PUT TOGETHER A STRUCTURE THAT WAS ATTRACTIVE TO INSTITUTIONAL INVESTORS. WHAT DO INSTITUTIONAL INVESTORS REQUIRE? THEY WANT TRANSPARENCY, THEY WANT GOVERNANCE, THEY WANT TO KNOW HOW DECISIONS ARE BEING MADE IN THE BEST INTERESTS OF THE INVESTORS THAT HAVE GIVEN THEIR CAPITAL TO INVEST. Mark Desario, Co-founder and CEO, Investbridge Capital
a long time to mature that up, but the issue is how much cash you need before you get to that cashflow breakeven and then can allow for this organic growth of the school. Legally what we’ve done, and we may, in certain jurisdictions, separate holding the school in a different entity than holding the actual physical operations of the school which gives us all kinds of flexibility in the future in having all the physical assets spun out into a specialised real estate investment trust for the benefit of the school operators. In our first phase though we will keep both sides consolidated and together, so we have both the asset coverage and the residual revenue, the profits of the school, coming to us.
Eighty-five to 90 cents of every dollar invested in the platform will go into the bricks and mortar itself.
Just to clarify, the schools will go cashflow positive in the first year of operations? All our business models project that the school should become self-sustaining and cashflow positive within the first full year of operations based upon a certain target for the initial student body. When you’re looking at investing in a school you need to allow yourself 24-36 months for a development period, which is the identification and acquisition of the land,
the building of the school and getting it all ready for the licencing. There is a very heavy upfront investment for the first two to two and half years, and that is all on the development side. Once the school opens its door, if you’ve done an effective marketing job and all the things that need to be done, you should be able to capture within the catchment area that you’ve established a student body of at least a couple hundred which will help you to get to be cashflow positive against your overheads. Now this is not going to return your invested capital, but you should not have to make any further investments into the school, and then it is now a matter of how quickly can you grow the student body to get to a mature school that will allow for a rational and reasonable return on investment on the initial commitment. It all works mathematically and it all works financially, but most importantly it works from the operator’s perspective and that they are aligned to make sure that school can perform not for a year or five years but for decades and decades and it’s a model that as I’ve said SABIS have been doing for 130 years and we’ve been able to look at that historic track record to make sure that this is a viable option as we come into the African market.
KUWAIT INVESTMENT FORUM
The Amir, Sheikh Sabah Al-Ahmad Al-Jaber, as he walks into the KIF 2018 opening session at Bayan Palace.
The forum unveiled the first stages of progress on the state’s long-term strategy, New Kuwait, since its inauguration in 2017
he Government of Kuwait last year launched the long-term strategy dubbed 'New Kuwait' envisioned by HH the Amir Sheikh Sabah Al-Ahmad Al-Jaber to transform the nation into a lucrative business and cultural hub by 2035. At a special feature on ‘New Kuwait’ during the forum, ministers from several departments provided an update on the development and projects announced, and unveiled the upcoming perspective of the strategic roadmap to progress. They discussed the achievements under the seven pillars of the New Kuwait: effective government, diverse and sustainable economy, quality infrastructure, sustainable living communities, quality healthcare, innovative human capital and prominent international position. HE Dr. Nayef Al-Hajraf set the grounds by providing an overview of the achievements made by Kuwait in the past year were highlighted. The country has achieved milestones in global rankings, improving from rank 90 to 59 in wastefulness of government spending, from 75 to 62 in quality of market regulation and from 108 to 90 in burden of government regulation, as per the Global Competitiveness Report 2017/18.
THE COUNTRY HAS ACHIEVED MILESTONES IN GLOBAL RANKINGS, IMPROVING FROM RANK 90 TO 59 IN WASTEFULNESS OF GOVERNMENT SPENDING, FROM 75 TO 62 IN QUALITY OF MARKET REGULATION AND FROM 108 TO 90 IN BURDEN OF GOVERNMENT REGULATION. Global Competitiveness Report 2017/18
He also highlighted Kuwait’s improved its ranking in the World Bank’s Ease of Doing Business report from 102 to 96, while Moody’s has rated the country’s credit rating at AA2 stable. Meanwhile, FTSE Russell classified Kuwait as emerging—all of which are indicators of the government’s role to focus on guaranteeing investor their rights and giving the private sector a stronger role in operations and project implementation. HE Khaled Nasser Al-Roudan, Minster of Commerce and Industry, highlighted the significant achievements made in the past year, particularly in driving inward foreign investment and boosting the role of the private sector, adding that the government is keen to serve as a facilitator that supports the business community. He highlighted that 29 foreign companies established in the country has helped attract KWD 725 million, and created 1,000 jobs for Kuwaiti nationals in 11 different business sectors. HE Bakheet Shabib Al-Rashidi, Minister of Oil and Minister of Electricity and Water, added that with the launch of New Kuwait, there has been commendable progress in areas including the energy sector and infrastructure development, which have also witnessed increased participation from the private sector. He highlighted the progress on strategic initiatives such as Kuwait Petroleum Corporation’s Environmental Fuel Project, the Clean Fuels Project, Al Zour Refinery and Mubarak Al Kabeer Port, among others, which will accelerate the country’s journey to a new era of economic and energy sector diversification.
He also provided an overview of the progress achieved in the nation’s focus on driving clean and renewable energy, and the emphasis on energy sector diversification and efficiency. He said the investments in infrastructure will further catalyse the economy and align it further with the vision of New Kuwait. HE Hind Sabeeh Barack Al-Sabeeh also iterated that just as it is important to focus
on infrastructure development, human capital development and community wellbeing was equally central to the New Kuwait strategy. She said that implementing an anti-corruption strategy is central to the vision, as it enhances transparency and investor confidence. An integrated, operational roadmap is already in place, in addition to implementing electronic government services that will also enhance governmental efficiency and transparency. Held under the patronage of HH the Amir Sheikh Sabah Al-Ahmad Al-Jaber, the KIF 2018 is co-organised by the Kuwait Direct Investment Promotion Authority (KDIPA), and the Kuwait Chamber of Commerce and Industry (KCCI) at the Bayan Palace and the Jaber Al-Ahmad Cultural Centre (JACC).
Among the highlights of the progress report presented by the ministers at the KIF 2018 are: • Facilitating ease of starting business through the Kuwait Business Center; it facilitated an increase number of companies with limited liability growing from 5,621 in 2016 to 9,682 in 2017 nearly double. • Al-Shaqaya Renewable Energy Complex aims to increase the capacity available for power plants; total completion rate of the project is 80 per cent and is due to be completed in 2022. • Olefins-Aromatics complex at Al-Zour Refinery to enhance status of the petrochemical industry in Kuwait and diversify the company’s products by adding specialised products. The goal is to produce 945,000 tonnes per year of polypropylene, 1.4 million tonnes of aromatic paraxylene; and 421,000 tonnes of benzene; among others. The overall achievement of the project is 8.6 per cent and is due to be completed in 2023. • Kuwait Petroleum Corporation’s Kuwait Integrated Petroleum Industries Co (KIPIC) to expand production to 615,000 barrels per day; scheduled for completion in 2020. • Clean Fuels Project, an overhaul of the Mina Abdullah and Mina Al-Ahmadi refineries, will increase oil production and development of reserves; the returns on investment on project is expected at 11.5 per cent; total completion of project now at 84.8 per cent. • Sheikh Jaber Causeway will serve as link between Kuwait City and Sabiya, reducing traffic jam; an overall achievement at 83.6 per cent. • Mubarak Al Kabeer Port to have 24 berths and capacity of 8.1 million TEUs; 51.5 per cent of which is completed. • Kuwait International Airport expansion is on schedule to welcome 25 million annual visitors. • The Municipal Solid Waste Treatment plant has achieved 75 per cent of its desired progress.
GLOBAL BUSINESS FORUM
L-R: Susanna Malcorra, former Foreign Minister of Argentina; Marcos Troyjo, Brazilian political economist; Lino Cattarruzzi, Managing Director of Middle East and North Africa at Google; and moderator, Louisa Bojesen, Broadcaster and Journalist.
New technologies and innovation can build new bridges between Latin America and the GCC, say business and government leaders at GBF Latin America 2018
ew technologies and innovation can build bridges between Latin America and the GCC, with the UAE serving as important gateway connecting people and ideas from both regions. Market players should leverage on these competencies to create new growth opportunities and drive key economic sectors in their respective countries. This was one of the key messages delivered by government and business leaders gathering at the Global Business Forum on Latin America 2018 recently in Dubai, during a panel session entitled “Redefining the Potential—The Search for Future Growth”. The session featured Susanna Malcorra, former Foreign Minister of Argentina; Marcos Troyjo, Brazilian political economist; and Lino Cattarruzzi, Managing Director of Middle East and North Africa at Google, who discussed the opportunities for increased collaboration between the GCC and Latin America. As to the most significant growth driver in Latin America over next decade, Cattaruzzi stressed the need for more direct flights connecting the two regions. He also predicted that the ease of doing business would continue to improve in both parts of the world, as technologies such as blockchain come into play. When asked about the growth potential for new partnerships with the Latin American countries, Malcorra explained that the region needs to project itself as
a geopolitically stable market to attract diverse portfolio of investment from other regions. Furthermore, more needs to be done to facilitate knowledge transfer and economic cooperation between the two regions. Latin America is looking to other parts of the world, including the Middle East, to help drive economic growth in many key sectors, including technology, agriculture, food security and supply chain, mining, tourism energy, in addition to renewable energies, she said. She noted that Latin America offers plenty of attractive growth opportunities but stressed the need to establish more public-private partnerships and improve logistics and connectivity with the region in order to make it more attractive to foreign companies and investors. Troyjo noted that Latin American governments have turned a corner as they make headway in fighting corruption and addressing key challenges facing the region. Argentina and Brazil have shifted toward economic liberalism in last five years, and as a result, have boosted their global appeal.
THE REGION NEEDS TO PROJECT ITSELF AS A GEOPOLITICALLY STABLE MARKET TO ATTRACT DIVERSE PORTFOLIO OF INVESTMENT FROM OTHER REGIONS. FURTHERMORE, MORE NEEDS TO BE DONE TO FACILITATE KNOWLEDGE TRANSFER AND ECONOMIC COOPERATION BETWEEN THE TWO REGIONS. Susanna Malcorra, former Foreign Minister of Argentina
When asked about the barriers to growth and what needs to be done to overcome them, Malcorra gave an example from Argentina whereby she discussed the government’s roadmap to facilitate supportive business atmosphere conducive to trade. In addition, publicprivate partnerships, and new regulation are being put in place in an effort to simplify easy of doing business in the country. Cattaruzzi added that Brazil is also lowering costs of starting a business, in a similar move as the UAE, and the government is working to reduce friction and develop an appetite for collaboration. While Malcorra agreed, she also emphasised the important role of business communities in fostering innovation and driving growth—giving the example that nine unicorns in Latin America have emerged and grown without government support. In closing, Malcorra said that Argentina is very keen to work with public and private sector stakeholders in the UAE and Middle East and called on countries in the region to take a closer look at Latin America, include the region as part of their diversification strategies, and adopt a long-term approach towards making investments in Latin American markets. Launched in 2016, the inaugural Global Business Forum on Latin America sparked enormous interest as market constituents explored the potential of new synergies between businesses in Dubai and Latin America. Opportunities are now expanding as Latin America’s leading economies search for additional growth drivers at home and team up with business partners who share their ambition to be part of a new era of globalisation. Now, across Latin America, both governments and businesses are rethinking their growth strategies. Many are taking bold steps, aiming to bring new dynamism to the private sector, dismantle obstacles to trade within Latin America and explore new markets—and growth is starting to return.
CENTRAL BANK GOVERNANCE FORUM
Participants at the 2018 Central Bank Governance Forum
Central bank officials from 60 countries debate emerging issues in governance, oversight and controls
he fourth Central Bank Governance Forum, jointly organised by Hawkamah and the International Monetary Fund (IMF), focused on board management and oversight, enterprise-wide risk management, and the changing role of the legal departments and internal auditing. Speakers and panellists highlighted the differences in approaches of central banks all over the world, and shared their insights on fintech, the expanding risk landscape, and the International Financial Reporting Standards requirements (IFRS 9). Previous forums have covered a wide range of timely issues and topics impacting central bank officials such as risk management, external audit oversight, assurance mechanisms, and cheques and balances.
THE FINANCIAL SECTOR CONTINUES TO EVOLVE RAPIDLY, AND CENTRAL BANKS HAVE REALISED THAT THEY NEED TO ADAPT QUICKLY, RETHINK THEIR APPROACH TO GOVERNANCE AND FORM NEW STRATEGIES THAT ENSURE FINANCIAL STABILITY AND EFFECTIVELY MANAGE NEW RISKS. HE Hamad Buamim, Chairman of the Board at Hawkamah and board member of Dubai International Financial Centre Authority
Simon Bradbury, Chief Accountant of the IMF said, "The Forum provided an excellent opportunity for the participants to exchange knowledge and experiences on governance arrangements, and the increasing expectations on risk management and internal audit practises. The active engagement and enthusiasm of the group highlighted how these are really pressing issues for central bank leadership in today’s evolving environment." HE Hamad Buamim, Chairman of the Board at Hawkamah and board member of Dubai International Financial Centre Authority said, “The financial sector continues to evolve rapidly, and central banks have realised that they need to adapt quickly, rethink their approach to governance and form new strategies that ensure financial stability and effectively manage new risks. Organisations need to remain vigilant in light of technological transformation and business model disruptions that characterise today’s competitive and fast-changing business environment.” HE Buamim further stressed the importance of organising events like the Central Bank Governance Forum, as they provide a powerful platform for central bank officials and key decision makers to collaborate and develop effective solutions to new challenges. He added that Dubai was an ideal place to host the forum, adding that the event strengthened Dubai’s profile as a leading financial hub for the Middle East and North Africa region. Hawkamah—the Institute for Corporate Governance, and the IMF brought together over 100 central bank officials and their audit partners from 60 countries in the Middle East, Africa, Central Asia, South Pacific, Europe, and North America to share experiences and address pressing governance issues affecting central banks at the two and a half day Central Bank Governance Forum held in Dubai.
THE LONG VIEW
2018: A BANKING ODYSSEY Tony Long, CEO of CPI Financial considers the benefits of AI as a force for economic and social good
n Stanley Kubrick’s seminal space movie 2001: A Space Odyssey, the central character is not one of Hollywood’s star actors, but a computer called Hal (a Hal 9000 to be precise) and whilst many people have debated the true meaning of Kubrick’s representation of Arthur C. Clarke’s book (Kubrick actually co-developed the book with Clarke whilst the film was being made and it was only published after the film was released), the basic tenet was that our lives will be controlled by computers with far superior intelligence to ours in the not too distant future. 2001: A Space Odyssey was released in April 1968 and fifty years on it seems that we are indeed heading rapidly towards the possible realisation of such a vision. Today we happily interact conversationally with devices in our homes to tell them what we want to buy or need to know and biometrics are increasingly a part of everyday life; whilst much of the highly skilled manual and intellectual office work that we have historically based our education systems on is being replaced by computerised precision machinery, artificial intelligence (AI) and robotic process automation (RPA). Many see this kind of progress as some dystopian future where not only will significant numbers of jobs be lost to technology, but also what we can do as individuals will increasingly be regulated by the vast amounts of data that our every move generates. But there is little doubt that our ability to create and develop such systems is going to bring a wealth of benefits that were unimaginable even just 20 years ago and a
Tony Long CEO, CPI Financial
new generation of workforce is becoming increasingly normalised to this way of life. The economic benefits of AI, especially to countries within emerging markets, where the lack of legacy systems and ageing infrastructure means they are able to implement leading edge technologies at speed are considerable. PwC estimates that the benefit to the global economy could be as much as $15.7 trillion—more than the current output of China and India combined ($6.6 trillion from increased productivity and $9.1 trillion from benefits to consumers). In its recent 2018 report The potential impact of AI in the Middle East, PwC estimates that the value of AI to the region could be as much as $320 billion by 2030, with the UAE set to benefit most in
relative terms at 14 per cent of GDP ($96 billion) and not surprisingly Saudi Arabia the most in absolute terms at $135 billion (12 per cent of GDP). In fact, the UAE and Saudi Arabia are placed third and fourth respectively behind the US (15 per cent) and China (26 per cent) in the global ranking of AI contribution to GDP by 2030, and well ahead of Europe and developed Asia. Overall, AI is expected to contribute 20 to 34 per cent of annual growth across the region, with the fastest growth coming from UAE (34 per cent) and Saudi Arabia (31 per cent), matching the International Data Corporation’s forecast of 32 per cent annual growth in expenditure on AI and cognitive technologies to $100 million by 2021. With most of the benefit being felt in the public sector and retail, wholesale and distribution trades (both 19 per cent), the benefit to the financial and professional services industry of $38 billion (14 per cent) is similar to technology and telecoms (15 per cent), transport and logistics (14 per cent) as well as construction and manufacturing (12 per cent). Banks have had a hard time recently with public perceptions and have shouldered a lot of the blame for the global financial crisis. The opportunity that AI and other fintech offers the banking industry to put its house in order and deliver genuinely beneficial products and services to its customers and their communities is one that can benefit us all, but especially those who need it most in the emerging markets around the world. This is a golden opportunity to be a part of the solution, and no longer the source of the problem.
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